FRANKFURT: European Central Bank policymakers will gather on Thursday for a crunch meeting, as soaring inflation heaps pressure on the bank to wind down its stimulus just as a new coronavirus variant threatens to derail the recovery.
The Frankfurt-based institution is expected to confirm the planned end of its massive pandemic-era stimulus plan in March, currently hoovering up around 70 billion euros ($78 billion) worth of assets every month.
The 1.85-trillion-euro pandemic emergency bond-buying programme (PEPP) is the ECB's main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.
The challenge for the ECB's 25-member governing council is finding a way to smooth the transition to avoid upsetting markets or jeopardising the eurozone's fragile rebound from the initial coronavirus shock.
Boosting the bank's pre-pandemic asset purchase programme (APP), currently running at 20 billion euros a month, or creating a new envelope for financial support through 2022 and beyond are two of the options discussed by observers.
The ECB will want to avoid a "cliff-effect" in asset purchases and would settle on an overall rate "between 40 and 60 billion euros" in the second quarter next year, said Konstantin Veit, portfolio manager at Pimco.
2024 in focus
In November, prices rose 4.9 percent year on year in the eurozone, a record in the history of the single currency.
While the ECB has up to now described the spike as "transitory", attributing it to one-off pandemic related factors, inflation has progressed at a rate that has exceeded observers' expectations.
The emergence of the more contagious Omicron variant has raised fears of more pandemic-related disruption, aggravating supply bottlenecks that have pushed prices up faster and hampered economic growth.
Alongside its monetary policy decisions, the ECB will publish its latest set of economic forecasts, including its first set of figures for 2024.
Last updated in September, the bank expected the economy to grow by five percent in 2021, 4.6 percent in 2022 and 2.1 percent in 2023.
On the inflation side, price rises were expected to be 2.2 percent in 2021 for the whole year, before dropping under the ECB's two-percent target for the next two years at 1.7 and 1.5 percent.
Recent pressure on prices could lead to "the largest ever upward revision to inflation in 2022, from 1.7 to 2.7 percent", according to Frederik Ducrozet, strategist at Pictet Wealth Management.
The focus will be on the new number for 2024, said Andrew Kenningham of Capital Economics, "the nearer this is to two percent, the closer the bank will be to raising rates".
But a lower figure could allow ECB President Christine Lagarde to continue to argue that the spike was a passing phenomenon in a press conference at 1430 local time (1330 GMT), paving the way for a more gradual easing of economic support.
Diverging approaches
Across the Atlantic, where the rise in inflation has been even steeper, the US Federal Reserve announced that it was doubling the pace of its withdrawal from asset purchases, bringing the end forward by several months.
Fed officials dropped talk of "transitory" inflation as figures for November showed a 6.8 percent year-on-year rise.
But the possibility of the ECB following suit still seemed distant, despite expectations in some corners of the market that the ECB will tighten its monetary policy more quickly.
Lagarde previously said it was "very unlikely" the ECB would raise its rates in 2022 from their historic lows, including a negative deposit rate that means lenders pay to park excess cash at the central bank.
Currently, the bank plans to end its asset purchase programme fully before moving on to rate hikes.
But even the most accommodative of responses from the governing council in the short term, extending its asset purchases under any guise, "should also leave the ECB with the possibility of earlier, and larger hikes", said Antoine Bouvet, a strategist at ING.
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