Central Banks

June PEPP expansion is probably not the last one


The ECB expands PEPP by €600bn while extending the programme until june 2021

The ECB yesterday announced a EUR600bn expansion of its Pandemic Emergency Purchase Programme (PEPP), slightly above our and market expectations of a EUR500bn increase, to bring the programme total to EUR1.35 trn. PEPP purchases will be extended by six months, until at least the end of June 2021, and the maturing bonds will be reinvested until at least the end of 2022. We have argued that the signal matters more than the actual numbers, which can always be adjusted in the future, but it is fair to say that the ECB over-delivered today, if only marginally.


The decision to reinvest maturing PEPP securities until at least the end of 2022 was not widely expected. There are counter-arguments to the extent that the PEPP is (supposed to be) temporary, but the main advantage is that reinvestments will allow the ECB to deviate to a greater extent from capital keys, and over a longer period of time. More importantly, the decision conveyed the idea that the PEPP is about to turn into a more standard policy tool, used not only to prevent financial fragmentation, but also to address the inflation outlook.


The ECB’s decision was justified by a further deterioration in the economic outlook, including a large downward revision to inflation projections. ECB staff projections for 2022 headline inflation (1.3%) and core inflation (0.9%) were the lowest on record despite the considerable amount of stimulus in the pipeline.


We now expect a final EUR500 bn expansion of the PEPP, to EUR1.85tn, to be announced in September 2020. The inclusion of fallen angels in this asset-purchase programme was not discussed, although any tightening in corporate credit conditions would force the ECB to respond.


We are not forecasting an increase in the PEPP based on an extrapolation of the current trend. More fundamentally, we expect the economy to remain vulnerable and the long-term implications of the current crisis to weigh on the inflation outlook. As a result, the so-called inflation gap – the distance between ECB projections and its inflation target – is likely to remain substantial for some time, calling for additional stimulus down the road, even under the assumption of a significant fiscal stimulus.


Meanwhile, we continue to expect the ECB to increase the tiering multiplier, from 6x to 7x, most likely in July after the next TLTRO allotment is known. Christine Lagarde insisted on the favourable terms applied to this operation, including a minimum interest rate as low as 1%. We expect a very large take-up, bringing the total of outstanding TLTRO operations well above the EUR1 trn mark.


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