Monetary policy update—March

The normalization of ECB policy will not be delayed by the invasion of Ukraine

• The ECB’s accelerated tapering timetable, announced last week, mirrors the Fed’s decision in December;

• Net asset purchases under the APP will now fall to EUR20 billion in June, 4 months ahead of the previous announcement;

• The normalization of the ECB’s rates can now begin as soon as Q3, bringing to an end a decade of ever-looser policy.

THE DECISION by the European Central Bank (ECB) last week to accelerate the tapering of asset purchases means all the major central banks except the Bank of Japan (BOJ) have now expedited the slowdown in their pace of asset purchases with a view to the normalization of rates.

Let’s compare the key tapering announcements so far.

A brief history of tapering announcements

In a sense, there was no announcement to be made by the Bank of England (BOE) since their tapering was on autopilot from early last year. Having announced in November 2020 that the total envelope for the Asset Purchase Facility (APF) would be GBP895bn, GBP150bn more than previous, such purchases were set to end in December 2021 and to taper organically as purchases were somewhat front-loaded.

However, this did not stop some on the MPC arguing in favour of reducing this envelope and ending asset purchases early. In September, “Two [MPC] members… preferr[ed] to reduce the target for the stock of UK government bond purchases from £875 billion to £840 billion.” Moreover, at the same meeting, the MPC gave themselves the option to raise Bank Rate before the end of net asset purchases—causing markets to question the sequencing of rates across other central banks.