The European Central Bank (ECB) announced that it will end its pandemic emergency asset procurement (PEPP) program worth €1,850 billion (US$2,100 billion) in March 2022. However, the ECB will maintain its previous asset purchase program.
Accordingly, the pre-pandemic asset purchase program will still be implemented and the scale will increase from the current 20 billion Euros/month to 40 billion Euros in the second quarter of 2022, then decrease to 30 billion Euros in the third quarter.
Notably, the ECB announced that it will keep interest rates unchanged at the current record low.
In a press conference after the central bank's monetary policy decision, ECB President Christine Lagarde said that the qualitative easing (QE) adjustment is to avoid a "brutal transition" for financial markets as the European economy continues to recover after the COVID-19 pandemic.
"We assess that the economic recovery progress and moving towards the medium-term inflation target will allow us to gradually reduce the pace of asset purchases in the coming quarters. However, monetary regulation is still needed to keep inflation at the 2% target in the medium term. Given the current uncertainty, we need to maintain flexibility in managing monetary policy," Lagarde said in her opening speech.
Monetary policy adjustments are made as the ECB sees strong growth from now until 2024. In the latest economic forecasts, the central bank forecasts the European economy to grow by 5.1% this year, up from the September forecast of 5.0%.
The ECB expects Europe's GDP to grow by 4.2% in 2022 and 2.9% in 2023. The entire European economy is expected to grow by 1.6%.
In addition to growth, the ECB also takes inflation more seriously. This year, inflation is expected to increase by 2.6%, higher than the September forecast of 2.2%. In 2022, price pressure is forecast to increase to 3.2%. Inflation is expected to increase by 1.8% in 2023 and 2024.
Chairman Lagarde said that while inflation will continue to be tense next year, the ECB will still focus on the average inflation target of 2%.
"1.8% is still not 2% in the long term," she emphasized.
"If price pressure leads to higher-than-expected salary increases or the economy recovers to full capacity, inflation could be very hot," she added.
As central banks begin raising exchange rates to fight inflation, the market will turn to another safe haven channel to allocate assets. The problem lies in the fact that gold is a poor long-term asset.
If inflation remains too high, gold - an anti-inflation barrier - will become a more attractive investment than bonds.
Inflation and interest rates next year will give the precious metals market clearer signals. The real inflation rate will be more important than the rate set by central banks because inflation is heating up every day.
