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* First political meeting since the review of the ECB’s strategy
* The ECB is about to promise a more prolonged stimulus
* The implications of a new strategy for policy are still under discussion
By Balazs Koranyi and Francesco Canepa
FRANKFURT, July 22 (Reuters) – The European Central Bank is almost certain to promise an even longer stimulus period on Thursday to deliver on its pledge to boost inflation, but the debate between policymakers is likely to be tense and no news measurement will not be announced.
The Governing Council will meet for the first time since the ECB unveiled an amended inflation target earlier this month, the culmination of an 18-month strategic review of its roles in a range of areas from l inflation to climate change.
Among his findings, he said that longer periods of ultra-low inflation like the current one require “particularly strong or persistent” support – ambiguous language that proves difficult to convert into real policy.
The rate regulators argued in early July on how to adapt their policy orientations to this commitment and ultimately postponed any changes in order to maintain unanimous support for the ambitious new strategic document.
The same differences are expected to resurface on Thursday and conservative policymakers like Bundesbank chief Jens Weidmann should not waver, so ECB chief Christine Lagarde will either have to compromise or give up her desire for unanimity.
This forward-looking guidance is vital as it will indicate the ECB’s approach to the fundamental decisions that need to be taken in upcoming meetings, including how to end its € 1.85 trillion pandemic support plan. and strengthen more traditional support measures.
The heart of the debate is whether the ECB should try to push inflation temporarily above its 2% target after a decade of failures, a politically risky exercise for inflation-cautious Germans who are already skeptical of the ECB’s stimulus efforts.
Signaling a potential compromise, ECB board member Isabel Schnabel argued that real consumer price growth – not just expectations – should rise before the ECB tightens policy, and that inflation overruns would be a sign of patience rather than a goal.
“The higher inflation outlook must be visibly reflected in the real dynamics of core inflation before it justifies a more fundamental reassessment of the medium-term inflation outlook,” said Schnabel, a German citizen. , this month.
POLICY MOVEMENTS
The new guidance will set the stage for a series of decisions, the first regarding the future of the Pandemic Emergency Procurement Program (PEPP), which may arrive as early as September.
Conservative policymakers argue that the emergency is drawing to a close and that the ECB must abandon its extraordinary powers and revert to more traditional measures, bound by tighter rules and a closer focus on returning inflation to the ‘objective.
“We believe there will have to be compromises between doves and hawks,” said Frederik Ducrozet, Pictet strategist.
“One possibility is that the PEPP will be phased out and fully buckled by March 2022, while the asset purchase program is extended by the end of 2021 to offset persistent downside risks.”
Another possible compromise is to retain some but not all of the flexibility of emergency bond purchases.
Under the PEPP, the ECB can buy bonds wherever it deems necessary and without predefined volume quotas. The longer-established APP, however, requires purchases commensurate with the size of each of the 19 eurozone economies, known as the capital key, at pre-defined volumes, and excludes heavily indebted Greece due to its credit rating. too weak.
BNP Paribas economist Luigi Speranza expects some additional flexibility to be provided beyond the pandemic.
“It would imply at least flexibility on size, such as a commitment to buy” at least “a number of bonds,” he said.
“Other factors could be added, such as tolerance for deviations from the capital key or reference to the self-imposed nature of issuer limits and the fact that these could be changed if necessary.”
The ECB is also expected to change the way it communicates its policy, with Lagarde promising “shorter and sharper” statements with less jargon.
The ECB announces its policy decision at 11:45 GMT, followed by Lagarde’s press conference at 12:30 GMT. (Reporting by Balazs Koranyi; Editing by Catherine Evans)
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