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The ECB may begin reducing bond purchases in the third quarter, says the Austrian governor

A Eurosystem monetary authority sign stands outside the headquarters of the European Central Bank.

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Robert Holzmann, governor of the Austrian central bank, told CNBC on Thursday that he thought the European Central Bank could possibly start reducing its bond purchases over the summer.

“When we decided in December to expand the PEPP program, we made a change by switching from a volume to be used to a volume that can be used,”

; he said.

“So what amount will be spent depends on the quarter in advance and the decision for the third quarter we make (it) at the end of the second quarter, and hopefully before that time there will be an opportunity to reduce purchases again, “Holzmann told CNBC’s” Street Signs Europe. “

The ECB launched an emergency buyback program in March 2020 to deal with the economic shock of the pandemic. This program, known as PEPP, is currently set to last until March 2022 and total up to 1.85 trillion euros ($ 2.2 trillion).

Hawkish members of the euro area central bank are less eager to spend the full amount provided by the emergency buying program, cautious about a long and significant intervention in the markets. But deaf members of the ECB are more cautious about lifting the stimulus pedal prematurely, as the eurozone economy is still too fragile.

Reducing asset purchases in the latter half of this year and fading out of PEPP could therefore be useful in this broader debate on the ECB’s methods.

The German Constitutional Court has questioned the legality of the ECB’s original asset buying program, a program introduced before the pandemic to deal with the sovereign debt crisis in 2011. Recently, the court also stopped the approval of EU-wide tax funds due to concerns that European laws do not allow the 27 EU countries to pack up and issue new debt jointly.

Some experts are concerned that the court will soon also question the ECB’s pandemic buying program, which could be a problem for the economic recovery in the region. Meanwhile, one of the current risks for the euro area is a potential increase in borrowing costs as inflation expectations rise.

Earlier Thursday, ECB member Klaas Knot told CNBC that the central bank could anticipate bond purchases as a way to contain borrowing costs (government interest rates) for eurozone governments.

“If it (rising bond yields) is due to better growth and inflation prospects, it’s completely benign, but if it’s due to profits from different regions of the world, then I think it’s perfectly legitimate for us to temporarily transfer some of those purchases,” Knot said.

His comment highlights the flexibility of the ECB’s buying program – an element that President Christine Lagarde often refers to.

Upward risks

Overall, the assessment for the euro area appears to be more positive than a few months ago.

In addition to expecting fewer bond purchases in the latter part of 2021, Austria’s central bank governor also sees upside risks to the euro area economy given the rise in business activity and vaccination rates.

“There may have been some errors in vaccination in recent weeks and months,” he said, “but with vaccination we now have an instrument that can clearly lead us out of this economic downturn.”

The ECB has expected GDP growth of 4% (gross domestic product) in the euro area this year, after the region fell almost 7% in 2020. The central bank sees GDP at 2.3% above pre-crisis levels by the end of 2023.

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