The European Central Bank (ECB) could boost its Pandemic Emergency Purchase Programme (PEPP) by a further 1 trillion euros ($1.12 trillion) over the next two to three years as the central bank's focus is likely to shift to inflation from financial market stability, according to Berenberg Bank's European Economist Florian Hense.
"while the market broadly anticipates one more expansion of the PEPP envelope by around 500-600 billion euros, the ECB could deliver a total increase of between 800 billion and 1.6 trillion euros, depending on the inflation outlook, the success of the ECB’s long-term loans, and the currently paused monetary policy strategy review," Hense said in a note on Friday, according to CNBC.
Linking the PEPP increase to the inflation downgrade is a clear sign that the ECB has shifted its focus from short-term crisis management towards supporting the economic recovery over the medium term.
It has managed to stabilize markets very effectively, but returning to the ‘pre-Covid inflation path’ is a different matter, though – and one that will take effort and time.
“The current inflation projections may still be too optimistic. If so, the ECB would need to do more than it already plans in response to its June downgrade of inflation.”
The ECB increased the size of its bond purchases by 600 billion euros to a total of 1.35 trillion euros earlier this month.
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