Inflation is biting and according to the latest estimates of the European Commission, released today, in the Eurozone it will rise to 2.2% in 2022. The ECB will publicly update its forecasts to the last board of the year, which is held in December. Hard to imagine that he will not revise the data upwards. And so, the Austrian governor Robert Holzmann puts his hands on the possible stop at “quantitative easing” a year or so later. The central banker in Vienna argues that the ordinary bond purchase program could be suspended as early as September next year or in the fall.
The PEPP, the 1,850 billion euro plan launched in March 2020 to react to the pandemic, will cease to exist in March 2022. After that, bond purchases will continue with “quantitative easing”, launched at the beginning of 2015 and suspended only for 2019. Currently, it is set at 20 billion euros per month. However, to avoid a sharp drop in purchases following the end of the PEPP, the ECB is discussing internally whether it should be strengthened. The figures that circulate range from 40 to 60 billion.
Without quantitative easing, the spread returns
The point is that with inflation above the target, the institute’s room for maneuver is reduced. So far, the official line of the board, similar to that of all the other major central banks, is that this is a transitory phenomenon, destined to revert to 2022. However, Holzmann is one of that group of bankers skeptical about the temporariness of the high inflation. “Don’t bet too much money on inflation below 2% at the end of 2022”. If the number of those who believe that inflation will remain high in the coming months increases, the political consensus around the strengthening of “quantitative easing” will fail.
Indeed, the spectrum of purchases that have completely ceased already by 2022 will advance.
Analysts do not believe that the ECB will put an end to purchases before the end of 2023. But everything will always depend on the evolution of inflation. In Germany, it is already at 4.5% and therefore the pressure of the Bundesbank to obtain a rate hike and the cut in monetary stimulus is getting stronger. Holzmann also expressed opposition to the launch of new T-Ltro auctions, those with which the ECB provides liquidity to banks in the area to support loans to the real economy. In his opinion, they have not proved effective, so he would not understand their continuation.
What would the early end of “quantitative easing” mean for our people BTp? It is not difficult to understand. Next year, the Treasury will have to issue over € 100 billion in net debt. The calculation does not take into account loans and subsidies received from Italy, nor the emissions necessary to finance our country’s participation in the Next Generation EU. Without purchases of enhanced bonds after the PEPP, net issues of € 40-50 billion would remain uncovered. If, then, the “quantitative easing” were to be stopped abruptly during the year (to date, an unlikely hypothesis), the “gap” would be even greater. Italian yields would soar and spread fever would return.