Investment Institute
Viewpoint Chief Economist

Is there life after PEPP?


Key points

  • Biden may arrive quite “empty handed” at COP26
  • Exploring US inflation dynamics – again
  • Villeroy de Galhau’s latest speech offers some insight into a “post-PEPP bond marke

The European Central Bank (ECB) governing council is busy preparing the next phase of its monetary policy when, in all likelihood, announcing in December that Pandemic Emergency Purchase Programme (PEPP) will not survive the winter. We have been intrigued by press reports these last two weeks suggesting the central bank is mulling a “third programme”, between the Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP), which would address bond market disruptions – read “peripheral spreads widening” – as PEPP is terminated, through discretionary interventions on selected national markets. We are very circumspect about such a concept, reminiscent of the ill-fated Securities Markets Programme (SMP) in 2010. This would make the ECB far too powerful if it could on its own extend or withdraw bond market support to member states without a clear “conditionality contract”. Ultimately, the ECB would be torn between accusations of intervening too late if it did not approve of the policy course of a member state, or symmetrically of being too complacent with adventurous governments if it felt compelled to intervene anyway to stop contagion. We think that the proposals made by Banque de France Governor Villeroy de Galhau in a speech last week to extend to APP some of the flexibility of PEPP would deal with a potential post-PEPP “withdrawal syndrome” much more efficiently.

But before turning to European monetary policy and with COP26 looming, we look at the headwinds blowing against the US administration’s determination to advance concretely on decarbonization. A key plank of Biden’s platform is the Clean Electricity Payment Programme (CEPP), which is under direct threat given the opposition of West Virginia Democratic Senator Joe Manchin. We think the alternatives – boosting and prolonging the tax credit for renewables – are sub-optimal primarily because CEPP was the closest possible substitute to proper carbon pricing in the US.

We also continue to explore inflation dynamics in the US. The September batch brought fodder for doves and hawks alike, between the deceleration in the price of the items affected by the microchip shortage and the reopening, and signs that the shock is spreading to a wider array of sectors. We continue to think that the impact of base effects is under-stated.

Download the insight
Download article (520.63 KB)

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Back to top