The ECB decided to moderately lower the pace of net asset purchases under the pandemic emergency purchase programme (PEPP) compared with the previous two quarters based on an assessment of financing conditions and the inflation outlook. We expect weekly PEPP purchases to decrease to $15bn (Q1 pace) from $20bn in Q2/Q3. We add that effective purchases in August were already lower because of low liquidity. This PEPP recalibration counts for the next three months with a new update in December. That’s the meeting where the ECB will also spell out how the transition period post PEPP will look like. We assume a temporary increase in APP bond purchases. Key ECB policy rates and forward guidance remained unchanged today. In her press conference, ECB President Lagarde emphasized that the rebound phase in recovery increasingly advanced. The same goes for the situation on the labour market. Lagarde maintained the mandatory disclaimer about the Delta covid-variant, though she adds that high vaccination rates so far prevented fresh economic restrictions. Q3 growth momentum will remain strong with supply problems even preventing better (manufacturing) growth. The ECB upgraded this year’s GDP forecast from 4.6% to 5% while keeping them broadly unchanged for 2022 and 2023 at respectively 4.6% (from 4.7%) and 2.1%. Risks to the economic outlook are broadly balanced. The central bank’s inflationary assessment remains an extremely soft one. Lagarde and co continue to side with the temporary higher inflation line. They have to acknowledge that the spike has been higher and that it might take slightly longer to return to normal than earlier envisioned, but stick with the view that inflation won’t return at all towards target over the policy horizon. New inflation forecasts capture this feeling: upgrades for 2021 (2.2% from 1.9%) and 2022 (1.7 from 1.5%), but broadly unchanged in 2023 (1.5% from 1.4%). We believe that this inflation view eventually determined an initially hesitant market reaction. EUR rates and the single currency drifted south after the inflation forecasts/view, ignoring a (rising) number of scenario’s which could nevertheless derail this soft inflation assessment. The main risk in this respect is a translation into wages at the traditional autumn wage negotiations. Another one is that supply bottlenecks remain longer part of the economic life than currently assumed. The German yield curve bull flattens at the time of writing with yields sliding by 0.6 bps (2-yr) to 1.5 bps (10-yr). Peripheral yield spreads vs Germany narrow by up to 4 bps for Italy. EUR/USD currently trades at 1.1820 compared to 1.1840 ahead of the press conference. European stock markets generally recovered opening losses to currently trade with marginal gains.
The central bank of Ukraine as expected raised its policy rate from 8.0% to 8.5%, the fourth time this year. The step was needed as inflation rose to 10.2% in July, compared to a policy target of 5.0%. The central bank indicated that inflation might remain in the 10-11% area short-term. In this respect, the Bank indicated that it stands ready to take additional action if needed. The august inflation data published later today might bring some comfort. Inflation in August printed at 0.2% M/M to remain unchanged at 10.2% Y/Y.
However, not all central banks in the region face similar inflationary headwinds. The central bank of Serbia today kept its repurchase rate unchanged at a record low 1.0%. In its statement, the national bank said that it sees no significant inflationary pressures despite strong growth of the economy (it expects 6.5% growth this year with upside risk). Inflation printed at 0.2% M/M and 3.3% Y/Y in July. The National Bank of Serbia set the headline inflation target from January 2021 to December 2023 at the level of 3%, with a tolerance band of ±1.5 percentage points.
US weekly jobless claims fell to a new post-pandemic low of 310k vs 335k expected. Continuing claims also fell, yet less than expected and from an upwardly revised previous figure. The data add more flair to last week’s disappointing payrolls report: the Deltavariant has stalled/postponed hiring but did not prompt mass layoffs. In coming releases we might also see the impact of the augmented unemployment benefits having expired this week.