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Preparing the ground for announcing new stimuli in December. This should be the main focus of Christine Lagarde, president of the European Central Bank (ECB), in the message that will be conveyed at the press conference after today’s meeting of the Board of Governors, according to analysts.
“The debate on further stimulus from the ECB has shifted from a ‘if’ to ‘when’ question,” said Nick Kounis. responsible for financial market research Dutch bank ABN-Amro. “This reflects signs that the euro zone economy is losing momentum, underlying weak inflationary pressures, the second wave of the virus, new restrictions and a change of tone by central bank members.”
For Kounis, the ECB could surprise with new measures ahead of expectations in October if it concludes that preventive action may be more powerful than being “behind the curve” in terms of shaping expectations on financial markets. “Furthermore, there is a risk management argument, as the outlook could deteriorate dramatically in the coming weeks if virus trends do not improve and governments react by tightening restrictions considerably.”
However, like most analysts, Kounis believes that the ECB should wait until the December meeting to announce the new stimulus, especially given the differences in the Board on the strategy to follow.
“The old division”
Franck Dixmier, fixed income global CIO of Allianz Global Investors (GI), explained that “in fact, the old divide between ‘pigeons’ and ‘hawks’ has reappeared, referring to previous disagreements between board members who prefer a more accommodative monetary policy (the ‘pigeons’) and those who prefer a more conservative or conventional one (the ‘hawks’).
“Christine Lagarde, who defends the search for consensus, will have a lot of work ahead of her to resolve an old debate: there is a risk that an even more aggressive policy for the purchase of sovereign bonds could be seen as financing the monetary deficit,” something prohibited by the treaties ”, he stressed.
Allianz GI analyst says there are other factors that could favor December’s choice for new stimuli. At its December meeting, the ECB is expected to update its macroeconomic projections. “We hope they are pessimistic, so it might be a good time to announce new support measures.”
Furthermore, the central bank will then have more perspective on the political risks that have emerged in recent weeks – such as Brexit and US elections – as well as the evolution of the pandemic.
Dixmier also says that the Pandemic Emergency Procurement Program (PEPP) continues to maintain its firepower and therefore there is no urgency to act now, other than to give a strong signal.
“In view of the deteriorating economic outlook and low inflation in the context of the escalating health crisis, Christine Lagarde must strongly affirm her willingness to take further monetary support measures at the end of the year,” she said.
Stimulus menu
The ECB launched the PEPP in March of this year to support the economy and markets to address the risks that the pandemic has caused in the euro area, initially with € 850 billion worth of purchases from and a deadline for it. year. At its June meeting, the ECB increased the amount by 600 billion (to cover the current total of 1.35 billion euros) and extended the deadline until June 2021.
If like for timing Analysts are waiting for an announcement in December, there are some differences of opinion on the nature of the new stimuli. Nick Kounis of ABN-Amro sees the PEPP as a central platform, as the ECB believes that the Facilitation for quantity, or the purchase of assets has a greater impact on growth and inflation than other instruments and that within the options the PEPP offers greater flexibility than “conventional” programs,
Carsten Brzeski, global macro manager of ING, on the other hand, expects an increase in the PSPP in December, at the expense of one in the PEPP.
Franck Dixmier, of Allianz GI, says the new stimulus should “include an extension of the PEPP, postponing its expected end from June to December 2021, and an increase in the ECB’s purchase program to meet record sovereign issues forecast in 2021. . ”, Adding that it also provides for new favorable conditions for TLTROs, long-term refinancing operations aimed at supporting bank credit.
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