Two questions could be exciting when the Governing Council, the highest monetary policy body in the euro area, meets this Thursday for the September meeting: Is the ECB raising its inflation forecast significantly?

And: What does the central bank say about the Eurosystem’s bond purchases after America’s central bank announced that it would reduce its purchases later this year?

Christian Siedenbiedel

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The ECB will hardly be able to avoid raising its inflation forecast for this year and next, says Holger Schmieding, chief economist at the Berenberg bank. “The current figures are well above what the ECB had expected in June.” The fund company Columbia Threadneedle sees it similarly in an analysis of the latest price developments. The ECB's June forecast for euro zone inflation for the full year 2021 was 1.9 percent, for 2022 1.5 percent. Since then, the monthly inflation rate has risen to 3 percent - and there is much to be said for a further increase by the end of the year.

“The real question is whether the ECB will stay at 1.4 percent for 2023,” says Schmieding: “This is crucial for your view of the medium term.” The central bank will probably hardly change this projection, the economist believes: “Would if they exceed 1.5 percent for inflation in 2023, that would be a signal that they permanently estimate inflationary pressure to be slightly higher than has been the case so far. "

Key interest rates are not yet an issue - but bond purchases are

A key rate hike is not yet up for debate - but the ECB is likely to make changes to the bond purchases. Most recently, the Eurosystem's central banks bought bonds for around 80 billion euros a month from the PEPP crisis program and an additional around 20 billion euros from the longer-term APP bond purchase program. In a survey by the Reuters agency of 42 economists, the majority said the ECB would now reduce the pace of bond purchases from the crisis program. It is still being discussed whether the monthly volume will be reduced from 80 to 60 or only to 70 billion euros.

Stefan Schneider, Germany’s chief economist at Deutsche Bank, says the central bank will go down to 60 billion euros a month: “This should also be a signal that the ECB is not taking rising inflation rates and forecasts too lightly takes."

As is usual with central banks, the ECB could develop its own language regulation for this.

In March, ECB President Christine Lagarde announced that bond purchases would be “significantly more extensive” in the second quarter than in the first few months.

She had retained this formulation for the third quarter.

Frederik Ducrozet, economist at Bank Pictet, speculates that the central bank could now go back in the fourth quarter from “significantly more extensive” to just “more extensive”.

Controversial opinions in the Governing Council

Several members of the Governing Council recently called for the future of bond purchases to be discussed, including the Austrian central bank chief Robert Holzmann and his Dutch colleague Klaas Knot. Bundesbank President Jens Weidmann called for the course not to be locked in for too long. Economist Ducrozet sees this as a strategy of the proponents of a tighter monetary policy in the Governing Council, called the Falken: They wanted to prevent compensation from being stipulated in the APP program for March 2022, when the emergency program expires, for example through higher purchases.

It is quite possible that this question will not be discussed yet, says Ducrozet: “It is more likely that hawks and pigeons should prepare for a tougher discussion about the future of the purchases, which will begin after the September meeting and with a political decision in December Michael Schubert, ECB expert at Commerzbank, said that this fundamental decision will not yet be made. He referred to the French central bank chief François Villeroy de Galhau, who had said in an interview that it was “not for September”. ECB chief economist Philip Lane had stated that one should not confuse a “limited adjustment”, the slowing down of the pace of bond purchases, with a “tapering”, the exit."The ongoing support from the ECB continues to provide tailwind for risk investments," commented the investment company Pimco on possible consequences of the ECB meeting.