The ECB has a crucial decision to make — here’s what analysts expect

by Warrior2

European Central Bank President Christine Lagarde, and key officials including chief economist Philip Lane, have made clear they are about to take action to boost the eurozone economy that has been thwarted by a new wave of government restrictions.

So the only debate heading into Thursday’s meeting is what, not if, action will be taken.

Here’s a look at what some leading observers are saying ahead of the meeting. The ECB decision will be announced at 1:45 p.m. local time, which is 7:45 a.m. Eastern, and the Lagarde press conference will start 45 minutes later. The consensus expectation is that the ECB will increase the size of the Pandemic Emergency Purchase Programme by €500 billion ($606 billion), and extend its expiration by six months, until December 2021.

ANZIf the ECB decides to maintain a cushion and extend the program for 12 months, an increase in the PEPP package of EUR650bn to around EUR2trn is plausible. A six-month extension could warrant an increase in the facility of EUR350bn. We are leaning towards a 12-month extension, while the median market expectation is for an increase in purchases of EUR500bn. Of course, the outcome will depend entirely on the ECB’s recalibration of what is needed to achieve its inflation mandate. Updated macroeconomic projections will also be published. We forecast 2021 inflation will rise by 0.7% vs the ECB’s current 1.0% projection.
Bank of AmericaWe expect the tiering multiplier to be lifted from 6 to 8-9; favorable TLTRO conditions to be extended by at least one year (potential for longer); an SME-specific TLTRO; PEPP reinvestment to be extended by one year until end-2023 at least; and PEPP purchases to be extended at least to end-2021. We have long expected the PEPP envelope to be topped up by EUR500bn. But we have changed our call here and expect PEPP to become “open-ended”, if not in time, in volume: “whatever it takes” during the pandemic. The weekly PEPP pace was always endogenous to market conditions and the ECB can make that even more obvious. We do not expect a depo cut. There will be questions about EURUSD, but in our view the best option for the ECB could be to acknowledge FX-driven inflation risks and be forceful in its commitment to long-lasting policy support.
Evercore ISIWith much already discounted in markets, we fear that the ECB may struggle durably to contain euro strength even with the longer PEPP extension that would imply a slowing in the pace of QE [quantitative easing] over time. This puts the spotlight also on the tone the ECB strikes on possible future depo rate cuts and the possibility (not likely but worth considering) of new rate guidance.
Goldman SachsOur economists expect an increase of the PEPP envelope by €400bn, with net purchases continuing until the end of 2021, as well as additional TLTROs [targeted longer-term refinancing operations], with an extension of the preferential rate period to December 2021. With the market also priced for a PEPP increase of a similar magnitude, we think that the hurdle for ECB-over-delivery is high.
INGThe aim of all ECB measures will be to extend the current very accommodative monetary stance, rather than increasing it. This current crisis is a crisis in which fiscal policy, not monetary policy, can make the difference for the economy. Therefore, while still vague enough to keep the door open, Christine Lagarde will try to signal that this new round of monetary action will really be the last one.
JefferiesBy the end of the year the ECB is on course to expand its balance sheet by close to 50% on where it was at the end of 2019 (by ~€2.3trn, just under 20% of euro area nominal GDP in 2019), split almost equally between additional QE and liquidity injected through the TLTROs. The ECB’s aims for 2021 are likely to be more modest, with the main objective being to preserve the favorable financing conditions achieved this year. In terms of policy, this means extending the favorable TLTRO terms by 12-24 months. At the moment, the -1% rate that the banks can get on their loans from the ECB (if they hit lending targets) is only in place until 23 June 2021, and this is likely to be extended, perhaps to the end of 2022.
Morgan StanleyWe expect further easing, concentrated on the two key pandemic tools of PEPP (flexible asset purchases) and TLTRO (cheap bank funding) to ensure that easy financing conditions are maintained while the economic impact of the crisis continues, i.e., for another year until shortly before the ECB expects output to return to pre-pandemic levels (2H22). We expect PEPP and TLTRO to be extended to June 2022, and up our PEPP top-up estimate from €500 billion to €600 billion, so buying can continue around the current pace of €16 billion/week. Also, we expect full reinvestment to be pushed back with the forecast to end-2023. We remain skeptical on a rate cut, given recent guidance, concerns about the side effects and the TLTRO bonus option as an alternative.
NomuraThe ECB is set to deliver a package of monetary policy easing measures but will it include a rate cut? Consensus says no, and while lower rates have not been a feature of ECB policy maker comments over the past month, we think a 10bp cut to the depo rate could be helpful as one of a range of measures.

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