Goldman Tweak PEPP Call

Goldman Sachs note that the "Euro area recovery has slowed notably as new COVID-19 cases have surged, core inflation has fallen to a new low and ECB officials have signalled increasing discomfort with the inflation outlook. We have therefore pulled our expectation for the announcement of additional QE forward to the December Governing Council meeting and now look for an extension of the pandemic QE programme (PEPP) to the end of 2021.

• Our analysis suggests that a PEPP expansion is likely to be more powerful in supporting the recovery of the Euro area economy - particularly in southern Europe, where it is most needed - than a rate cut or an expansion of the regular asset purchase programme (APP). Moreover, a PEPP extension would provide the Governing Council with greater operational flexibility than topping up the APP as it is not subject to issuer constraints.
• We expect the Governing Council to increase the PEPP envelope by EUR 400bn for a total of EUR 1.75tn and extend the horizon for net purchases to at least the end of 2021. We see a high bar for a policy rate cut, but do expect the PEPP extension to be flanked by other measures, such as adjustments to the TLTRO terms and an extension of the PEPP reinvestment horizon to the end of 2023. Moreover, we continue to expect APP to be expanded after the end of PEPP."