Since the coronavirus pandemic hit Europe last year, conservative policymakers at the European Central Bank have put aside their discomfort with ultra-loose monetary policy to stand behind the region’s crisis-hit economy.

But even as the continent remains mired in rising infections, the “hawks” are urging the central bank to prepare to scale back its huge bond-buying programme.

This potential shift, which risks dividing the ECB governing council and unsettling investors in eurozone bond markets, is expected to be discussed at the bank’s monetary policy meeting on Thursday, although any action is unlikely before its next meeting in June at the earliest.

When the eurozone was plunged into a record postwar recession last year, economists praised the ECB for massively scaling up its bond-buying activities with its pandemic emergency purchase programme (PEPP), which has helped to keep borrowing costs low for governments, businesses and households.

Having twice expanded the size of the emergency bond-buying scheme last year, the ECB still has almost half the overall €1.85tn left to spend under PEPP. It plans to keep net purchases going until at least March 2022 and to stop only once the pandemic crisis is over.

However, even though the eurozone economy remains weighed down by rising Covid-19 infections and containment measures, the more hawkish ECB council members are making the case that it should start reining in its bond-buying sooner rather than later.

“The emergency monetary policy measures must not be permitted to persist indefinitely,” Jens Weidmann, head of Germany’s central bank, told journalists in Frankfurt two weeks ago. “They need to remain closely linked to the crisis and come to an end once the pandemic is over.”

Klaas Knot, head of the Dutch central bank, went further a few days later, saying that if inflation and growth improved as expected from the second half of this year, then “from the third quarter onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022”.

At the ECB’s last monetary policy meeting, council members all agreed to conduct PEPP purchases at a “significantly higher pace” in the second quarter to avoid a sell-off in bond markets pushing up borrowing costs before a recovery had taken hold.

But since then, its weekly net purchases have increased only marginally, leaving analysts scratching their heads and wondering if the recent rebound in sovereign bond markets led ECB officials to have second thoughts.

Frederik Ducrozet, a strategist at Pictet Wealth Management, said the hawks on the ECB council “only agreed to this front-loading of bond-purchases on the condition that they would be reduced again in the third quarter and that PEPP is not expanded again”.

With the ECB due to publish new economic forecasts in June, which the hawks expect to reflect a brightening outlook for growth and inflation, they have identified that month’s meeting as the earliest opportunity to push for a scaling-back of bond purchases.

Line chart of GDP (2019 = 100) April 2021 IMF forecast showing The recovery in the eurozone will lag behind the US and China

Most economists view the debate as premature, especially as eurozone output is not expected to rebound to pre-pandemic levels before next year and is still lagging behind most other major economies.

“These are trial balloons being floated by the hawks to see how the market reacts,” said Katharina Utermöhl, an economist at Allianz. “But it is odd for the ECB to fuel discussion about this at a time when we are lagging so far behind the US, and even there the Federal Reserve is still pushing back against any suggestion of tapering.”

The hawks have long been in a minority on the ECB council and there is likely to be firm resistance to the idea of curtailing bond purchases too soon. Christine Lagarde, president of the ECB, said last week that fiscal and monetary support would be “needed well into the recovery”.

Most analysts think Europe is unlikely to experience a repeat of the “taper tantrum” that caused a sell-off in US treasury markets in 2013 after the Fed announced plans to reduce the volume of bond purchases.

The main reason for this is that the ECB is not planning to end bond purchases completely next year. Instead, it is expected to bulk up its traditional asset purchase programme, which continues to buy €20bn of bonds a month and has hoovered up almost €3tn since 2015.

Key drivers of eurozone inflation

François Villeroy de Galhau, Banque de France governor and ECB council member, said this month that the end of PEPP would “not imply an abrupt tightening of our monetary policy” as the traditional asset purchase programme would continue and could be “somewhat adapted”.

Ducrozet at Pictet said the ECB would also continue reinvesting money from maturing bonds in its €1.85tn PEPP portfolio for several more years — providing extra stimulus. “The market can handle an exit from PEPP,” he said, pointing out that government debt issuance is expected to fall from recent highs next year, meaning the ECB will have less to buy.

The worry for the ECB, however, would be if inflation continued to rise sharply, forcing it to tighten policy even if the eurozone’s economic recovery faltered and borrowing costs rose for the most heavily indebted governments.

Maria Demertzis, deputy director of the Brussels-based think-tank Bruegel, said: “If inflation were to come back sustainably it would put the ECB in a very difficult position because we would still be in a very weak recovery and it would put the onus much more on fiscal policy with an increased risk of financial market fragmentation.”

Having fallen below zero in the final months of last year, eurozone inflation jumped to 1.3 per cent in recent months and the ECB expects it to surpass its target of just below 2 per cent in the final quarter of this year, albeit only temporarily.

The ECB has said inflation is being pushed up by one-off factors that it expects to fade next year. But German inflation is set to rise above 3 per cent this year, and Weidmann recently warned that “we might have to contend with stronger inflationary forces again in the future”.

In a taste of the potential battle that lies ahead, the Bundesbank chief said: “There can be no lack of determination, even if rising interest rates increase countries’ borrowing costs. This is important for the credibility of monetary policy.”