At its latest monetary policy meeting on 9 September 2021, the European Central Bank (ECB) announced a moderate reduction in the pace of its pandemic emergency purchase programme (PEPP), as the market had expected. The modest reduction was justified owing to the ongoing recovery and with the expectation that the reduced rate would continue to maintain very easy financing conditions.

Notably, ECB President Christine Lagarde was quick to clarify that this was not tapering, but recalibration, and equated it as being akin to the increase in pace seen earlier in the year. In addition to this tentative reduction, we were also informed that the future demise of PEPP would likely be revealed at the December meeting (PEPP is currently expected to run until at least March 2022).

Stepping away from news on the asset purchases, there was arguably a more significant shift in the characterisation of the recovery and the risks in the opening statement. It has been a while since the ECB spoke of potential upside risks to inflation. However, the statement explicitly referred to persistent price pressures as an upside risk and the staff’s forecasts were revised up across the board. While the ECB expects the current above target inflation rates to be transitory and forecasts inflation to be at 1.5% on core and headline inflation in 2023 (still far below their new 2% target), for once the hawks on the Council seem to be gaining a greater voice in the calculus of the balance of risks.