ECB December meeting: flexibility added to the APP

The sharp rise in infections and inflation and the emergence of the new Omicron variant has complicated the picture to an extent , that the Governing Council may need more time to decide on all the details of adjust ing its non-conventional policy tools. That said, we still expect an announcement that the PEPP program will be ended by March and we also expect a clear signal that the APP will be used in a more flexible way, allowing the ECB to respond quicker to an y unwarranted tightening of financial conditions. The GC may agree on an overall envelope for APP purchases but use discretion on when and how to spend it. But it may also be that a ny decision on the length or volume of the APP may be postponed , until there is more clarity on how the pandemic will evolve. A majority on the Governing Council will stick to the “temporary” narrative with respect to the current elevated level of inflation and we expect the updated staff projections to show inflation to be below 2% in 2023 and 2024 . We expect the overall tone of the meeting to be neutral. While the ECB will have to acknowledge that the near - term risks to inflation have clearly shifted upwards , it will also stress the potential downside risk and its willingness to ease policy again should this be needed.