MNI POLICY: ECB Hikes PEPP As Inflation Outlook Slides

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank delivered a EUR600 billion

increase to its Covid-19 pandemic emergency purchase programme on Thursday,

citing a downward revision of its inflation outlook as a key factor in the

decision.

     The horizon for PEPP was also pushed out from the end of 2020 to "at least"

the end of June 2021. The reinvestment of the principal payment from maturing

securities bought under PEPP was announced, until at least the end of 2022, with

the future roll-off of the PEPP portfolio "managed to avoid interference with

the appropriate monetary policy stance."

     The EUR600 billion boost was "the appropriate size" to move inflation

"significantly closer" to its pre-pandemic path, ECB president Christine Lagarde

said. The baseline scenario for annual HICP inflation in 2020 is 0.3% in 2020,

0.8% in 2021 and only 1.3% in 2022, according to June's Eurosystem staff

projections.

     While economic data has shown some signs of a bottoming out, Lagarde said

that the improvement has so far been "tepid compared with the speed at which the

indicators plummeted in the preceding two months."

     June's Eurosystem staff macroeconomic projections saw euro area growth

falling at an "unprecedented pace" in the second quarter of this year, with

price pressures expected to remain subdued despite fiscal and monetary support,

the gradual easing of lockdown measures, and a slow pickup in global economic

activity.

     Real GDP is expected to fall by 8.7% in 2020, Lagarde said, before

rebounding by 5.2% in 2021 and by 3.3% in 2022, representing a 9.5% downward

revision for 2020 from March's projections, and an upward revision of 3.9% and

1.9% for 2021 and 2022, respectively. The balance of risks is tilted to the

downside amid "exceptional uncertainty."

     Weaker demand is expected to be only partially offset by upward pressures

related to supply constraints, Lagarde said, with current and futures prices for

oil suggesting inflation will decline somewhat further and remain "subdued"

until the end of the year.

     Key interest rates and other monetary policy tools remained unchanged, with

the Governing Council repeating its readiness to adjust all its instruments.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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