ECB to kick off its tapering debate as inflation surges to a 10-year high

The President of the European Central Bank Christine Lagarde delivers remarks during a joint press conference in Lisbon, Portugal.

Market participants are keenly watching the European Central bank this week as the Frankfurt institution meets to discuss its pandemic – era stimulus amid soaring inflation and solid economic growth.

Some inside and outside the bank believe it’s high time that the ECB reduces its monetary stimulus as global supply chain problems push prices higher for all sorts of goods. But uncertainty over the coronavirus pandemic still remains.

“Whereas the ECB may moderate the pace of its emergency asset purchases modestly in [the fourth quarter], we do not expect the bank to announce when and how it will phase out its big ‘Pandemic Emergency Purchase Programme’ (PEPP) and whether and to what extent it will beef up its modest standard Asset Purchase Programme (APP) and make it more flexible,” Holger Schmieding, a chief economist with Berenberg Bank, said in a research note.

Currently, the ECB buys 80 billion euros worth of bonds every month under the program, which will likely be reduced to 70 billion euros at the completion of its Governing Council meeting on Thursday, Shmieding added.

10-year high

Inflation in the euro zone hit a 10-year high of 3% in August, while gross domestic product in the second quarter surprised to the upside with a 2% gain quarter-on-quarter. These developments may push the ECB to also upgrade its growth projections as Vice president Luis de Guindos recently hinted at. But yet there are doubts in the market.