— Some members argued for a more rapid return to policy normalisation
LONDON (MaceNews) – The European Central Bank’s decision to expand its asset purchase programme from April met with spirited opposition from some members of the Governing Council, suggesting deep divisions amongst rate setters, according to minutes of the policy meeting on 15-16 December, released on Thursday.
“Some members could not support the overall package” presented by ECB Chief Economist Philip Lane, although the proposals were agreed by “a large majority,” according to the text.
The ECB announced an end to its €1.85 trillion Pandemic Emergency Purchase Programme from March, but will increase its long-running Asset Purchase Programme to €40 billion in the second quarter and €30 billion in the third, before reinstating the current envelope of €20 billion in the final three months of 2023.
Members were also divided over the decision to extend the reinvestment horizon for PEPP purchases by one year, through the end of 2024. The “reservations” of some council members “pertained to the recalibration of APP purchases and and the extension of the minimum PEE reinvestment period, as well as the flexibility in future asset purchases beyond the confines of the pandemic.”
Unlike the PEPP, the APP is unable to purchase Greek bonds, which are rated as below investment grade. The governing council finessed the constraint by agreeing to include Greek government assets in PEPP reinvestments.
The risk of widening spreads between German yields and those on the periphery of the eurozone — or market fragmentation — “should not be used as an argument against modifying the policy stance,” some members noted.
Both Jens Weidmann, the former head of the Bundesbank, and Klaas Knot, president of the Dutch central bank, opposed the expansion of the APP, according to widespread reports following the December meeting. Knot has expressed support for a rate hike in early 2023, much earlier than the market expectation of a fourth quarter 2023 liftoff. The pair are widely believed to be amongst the cohort of members who cautioned that a “higher for long” inflation scenario could not be ruled out.
However, ECB President Christine Lagarde has insisted that an easy policy stance is justified, with inflation forecast to retreat to 1.8% — below the ECB’s 2.0% target — in 2023. Inflation accelerated to an annual rate of 5.0% in December, the highest since the formation of the euro, according to Eurostat data released earlier on Thursday.
The December meeting was the last for Weidmann, and many believe that his departure from the Bundesbank may have been due to his opposition to the ECB’s easy policy stance.
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