MNI PREVIEW: ECB Likely On Hold, PEPP Top Up In Focus

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank is likely to leave policy

unchanged when it meets on Thursday, though pressure to ensure financial market

integrity and do whatever it takes to protect the eurozone economy means a

decision to increase the size, scope or duration of the ECB's Pandemic Emergency

Purchase Programme cannot be entirely ruled out.

     With sources indicating that ECB watchers should expect "more on the

political side in the short run," and having been widely perceived to have

underwhelmed initially, President Christine Lagarde will be keen to make the

most of the ECB's strong response to the Covid-19 pandemic, while manoeuvering

Brussels into doing more of the heavy lifting.

     Here are the key points to look out for on Thursday:

     PEPP/APP

     --After front-loading purchases under its PEPP programme, there has been

much speculation that the ECB will need to boost the size of its EUR750 billion

before the end of the year. MNI sources suggested there was "no immediate need"

to do so, albeit with the caveat that the current level of purchases may not be

sustainable beyond the autumn/winter. Lagarde is likely to signal the Governing

Council's willingness to expand both PEPP and APP as necessary, but without

pinning figures or a timetable to either. The ECB could indicate that it will

continue to reinvest its PEPP proceeds beyond the purchase window, while

stressing its temporary nature. Though it is unlikely Lagarde will announce the

permanent abandonment of the ECB's self-imposed 33% issuer limit or capital key,

she may have to respond to calls for greater transparency in how the ECB carries

out its PEPP purchases.

     FALLEN ANGELS

     --Last week's ad hoc decision to accept as collateral bonds that were

investment grade on Apr. 7 was described by an ECB source as a "milestone" and

exemplified its readiness act outside of the usual timetable. Though nothing can

be ruled out, the decision by S&P Global Ratings not to downgrade Italian debt

means governors will be less inclined to push for junk bonds to be included in

QE operations for the time being. A decision to extend the scope of the most

recent collateral easing decision past September 2021 cannot be ruled out, while

a statement can be expected reinforcing the Governing Council's vigilance

regarding signs of tightening financial conditions via Euribor and sovereign

spreads, and their readiness to react.

     LTRO/TLTROs

     --Having announced additional LTRO operations in March, it would be no

surprise if they are extended beyond the original maturation date of June 24,

combined with an easing of the benchmark lending conditions for each. An

extension of ECB lending, including the weekly bridge LTRO, would also suit

Governing Council members whose sentiments align with their political

counterparts in preferring loans over grants.

     DEPOSIT RATE, TIERING

     --After spurning the opportunity to cut rates at the outset of the crisis,

there appears to be little-to-no appetite to do so now, with one MNI source

describing it as a "feeble" move of "last resort," and citing financial

stability concerns. Even so, the same official was confident rates could go

lower, with a change to the tiering multiplier offsetting some of the pain for

banks, should there be a "sharp deterioration" in the situation. That situation

has not yet materialised, but it is not inconceivable that the tiering

multiplier could be adjusted without a simultaneous move on the deposit rate at

some point in the near future.

     GERMAN RULING

     -- The German Constitutional Court is due to rule on APP on May 5. If

raised by journalists, Lagarde will likely argue that PEPP is exceptional and

temporary in nature, and therefore is not touched by any decision that goes

against the ECB. In a recent letter to MEP's, Lagarde was clear that the ECB has

never discussed using helicopter money. The question of whether or not the ECB

is engaging in monetary financing appears to be of little concern to some

Governing Council members - at least until the EU can produce a concrete

recovery package of its own.

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

[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$]