ECB Preview - July 2020: ECB On Autopilot As The List of Questions Grow

MNI Point of View:

• No change in policy is expected at this week's meeting.
• Dovish surprise: Including 'fallen angels' to the list of eligible PEPP securities.
• Hawkish surprise: A particularly optimistic assessment of recent economic data releases.
• Fundamental questions will emerge on how the ECB handles economic uncertainty and the evolution of PEPP (potential ceiling, lifespan and capital key deviations).

To get straight to the conclusion, the ECB is almost certain to keep policy unchanged at the July monetary policy meeting. Having over-delivered with a EUR600bn expansion to the PEPP envelope at the June meeting, and with strong demand for the more favourable TLTRO-III (E1,308bn), the bar for additional policy action in the immediate term is relatively high. Even technical adjustments such as raising the deposit tiering multiple, or including 'fallen angels' into the universe of eligible PEPP securities, are likely to be reserved for potential future use if fragmentation risks return. Both of these measures would be a positive surprise for the July meeting. In addition, although some ECB members have talked about the PEPP envelope not being fully utilised, it is too premature to make this judgement and the ECB will instead continue to assert that it stands ready to adjust all policy tools as necessary.

Click here for the full ECB Previewor see attached below:

ECB_Preview_July_2020 (2).pdf