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Marginal Adjustments In June; September Meeting Gaining In Importance

Maintaining a higher PEPP pace relative to earlier in the year is the path of least resistance for the ECB.

  • As reflected in recent GC commentary, talk of PEPP tapering is premature given that the economic recovery is still in the early stages and herd immunity against Covid-19 has not yet been reached.
  • With policy and communication adjustments (i.e. PEPP pace and guidance, forecast revisions etc) likely to be minimal, the September meeting will gain in importance. At this point the current PEPP envelope would have just over six months left until expiry and the GC will have much greater visibility on progress towards herd immunity and the state of the economic recovery.

Baseline Scenario: The ECB reaffirms its commitment to conduct PEPP at a higher pace, but could moderate the language from "significantly higher". Staff macroeconomic projections show a modest uptick in the growth and inflation forecasts, with the latter still below target over the medium term and the risk assessment considered 'balanced'.

Dovish Scenario: The ECB again reaffirms its commitment to conduct PEPP at a higher pace and maintains the "significantly higher" phrasing, while striking a cautious tone with respect to the economic outlook. President Lagarde pushes back on speculation around PEPP tapering, and stresses that prolonged policy accommodation will be required even once the pandemic crisis phased as passed owing to the still weak inflation outlook, and the possibility of economic scarring. The economic and inflation forecasts are still revised higher but potentially to a smaller degree than in the baseline scenario.

Hawkish Scenario: The ECB drops reference to "significantly higher" and indicates that the PEPP pace will return to 'normal' levels, citing the improvement in the economic outlook and progress on vaccinations. While the ECB will not go as far as to say that the tightening in financial conditions since March is justified, neither is this development likely to require a policy response. While the economic and inflation projections will be revised to the same degree as in the baseline scenario, the balance of risks is tilted to the upside.

For the full publication, please see:

ECB Preview June 2021.pdf