The ECB is very likely to continue to monetise fiscal deficits until the euro zone’s output gap has returned to normal

We think that the ECB has effectively adopted a smart monetary policy rule: It monetises c yclical fiscal deficits to enable them to be as high as necessary during recessions; It refuses to monetise structural fiscal deficits so as to not give rise to a moral hazard that would encourag e governments to never correct their fiscal deficits during growth periods. This means that the ECB will keep quantitative easing (the PEPP) in place until the euro zone’s output gap (the gap between actual and potential GDP) has returned to normal (i.e. until GDP has returned to the level of potential GDP), which will not happen before early 2023.