ECB: Much of the same for (much) longer
In line with its recent comments by officials, we expect the European Central Bank (ECB) to increase Pandemic Emergency Purchase Programme (PEPP) by at least EUR500bn when the bank’s governing council meets next week and to extend the programme until mid-2022 We also expect the ECB to announce new Targeted Longer-Term Refinancing Operations (TLTRO) with a longer discount period (until June 2022) at an unchanged minimum interest rate of -1%.
In addition to longer policy support, the ECB might consider other ways to shield the real economy against the delayed effects of the pandemic. Inclusion of ‘fallen angels’ corporate bonds in the PEPP under strict conditions is possible. Some TLTRO features could likewise be adjusted to further support bank lending, including larger allowances, the inclusion of mortgage loans in the eligible loan book, or a cut in the minimum TLTRO rate to -1.25% (although the latter is more likely in 2021).
Ultimately, we continue to expect the ECB to increase its standard vehicle for quantitative easing, the Asset Purchase Programme (APP), to address the issue of chronically low inflation, while it could transfer for the PEPP’s flexible features to the APP, most likely after the strategy review is concluded.
ECB officials have been equally clear about their reluctance to cut the deposit facility rate further into negative territory. Currency appreciation could be an issue as the US dollar weakens, but right now the improvement in the outlook for global growth is likely to outweigh the drag from a stronger euro.
Staff projections for real GDP growth and HICP inflation will be influenced by conflicting forces. That said, the starting point for next year will be carryover effects from weak Q4 GDP and low inflation, which will very likely result in a downgrade to 2021 projections. The ECB may try and balance out the pessimism with a slightly more upbeat growth outlook for 2022 and 2023, but the bank will also try to avoid seeming complacent as long as inflation is showing no sign whatsoever of a sustained rebound.
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