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ECB expected to stay put


Presumed to be already economically weak, the Euro area’s prospect of a near-term economic revival, following the COVID-19 outbreak, has undoubtedly been hindered.

Pressure on policymakers to take preventive measures to stimulate the economy and thus mitigate the subsequent economic repercussions brought about by the unprecedented COVID-19 pandemic mounted. Economic data which typically evaluates recent developments in economic activity and provides guidance to the ECB, dictating policy actions put forward, had deteriorated, dragging price growth in the block to 0.1 per cent in May; the lowest rate since 2016.

In a bid to counteract the downside risks posed by the COVID-19 pandemic, the European Central Bank in its June meeting ramped up its Pandemic Emergency Purchase Programme (PEPP) – a temporary asset purchase programme, introduced in March 2020 to counter the serious risks to monetary policy transmission mechanism and the outlook for the Euro area posed by the COVID-19 outbreak.

Surpassing economist and investor expectations, ECB’s president Christine Lagarde announced that the scheme, initially worth €750 billion, was being increased by a further €600 billion, bringing the total envelope of purchases up to a significant €1.35 trillion. Additionally, the scheme, originally intended to run until the end of the year was extended to run at least, until the end of June 2021.

Now, the outlook within the euro area is seemingly less gloomy than it appeared just a few weeks ago. Since the June 4 meeting, unlike other parts of the world, particularly the US and Latin America, member states have to-date managed to reopen their economies without triggering a second wave of infections. Although regarded as premature at this stage, the improvement in economic figures, notably PMIs and retail sales, witnessed across all member states, not just those enjoying more robust fundamentals, may be evidence that the recovery in single currency bloc may be closer to a ‘V-shape’ than initially anticipated.

Also portraying the latter positive sentiment are Italy’s and Spain’s 10-year bond yields – Euro bloc’s worst hit by the pandemic, which to-date seem to have retracted back to pre-pandemic levels.

Given the extensive stimulus measures already unveiled in the bloc, and the headway noted above, expectations for a change in policy in today’s meeting are slim to none. The improvement in both economic data and contagion figures, since the ECB’s most recent meeting, lessen the need, at least, at this stage, for extra monetary accommodation.

Appearing to confirm the latter expectations, Christine Lagarde, during an interview with the Financial Times stated; “We have done so much that we have quite a bit of time to assess [the incoming economic data] carefully.”

With no major announcements expected to be made during today’s meeting, the ECB is likely to instead use the meeting as an opportunity to; take stock of the effectiveness of its measures thus far, focus on the evolving economic outlook, and ultimately exert further pressure on European authorities to do more to support the bloc’s economy. A move, which may prove fruitful before the face-to-face summit between EU leaders, set to discuss a planned €750 billion fiscal rescue plan to support the countries worst hit by the COVID-19 pandemic. While there appears sufficient support to get the program over the line, stiff opposition by some member states persists, over the idea of distributing the money as grants rather than loans.

While it may be tempting for Christine Lagarde to discuss when and how to begin withdrawing its emergency stimulus packages, we believe that albeit the favourable market movements and uptick in economic figures highlighted above, the recovery is still in its infancy and downside risks remain. Rather than delving into a possible exit strategy, the ECB must use this meeting to reassure markets that the central bank for the euro bloc does indeed have more firepower, should the need arise.

Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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