MNI PREVIEW (RPT): ECB Likely To Wait Before PEPP Boost

The European Central Bank should adopt a 'wait-and-see' approach at its meeting on Thursday as it assesses the impact of the second wave of Covid-19 before adding to the EUR1.35 trillion envelope of its pandemic emergency purchase programme, although it could point to a faster pace of bond buys or authorise a fresh EUR120 billion for its pre-pandemic quantitative easing, sources told MNI.

President Christine Lagarde is expected to adopt a more downbeat tone, emphasising downside risks and elevated uncertainty, as well as the uneven pattern of recovery in different parts of the eurozone. But she is likely to maintain a "steady hand" – a phrase used several times recently by both the Executive Board and MNI's ECB sources --, and it would be a shock were she to announce the ECB's base case scenario is in danger.

The ECB meets under pressure to increase PEPP, as rising Covid infection rates result in fresh lockdown measures even as the recovery from the first round of restrictions is already slowing, and amid growing concern over the timing and scale of any boost provided by EU fiscal support.

Some countries are reportedly preferring to rely on ECB-buoyed bond markets rather than accept EU loans, though any suggestion the Governing Council should accommodate such a strategy will rile hawks already wary of boosting PEPP prematurely.

As Vice President Luis de Guindos stressed in an interview with MNI, there is plenty of room left in the PEPP's existing envelope. The ECB is likely to wait until December's round of macro projections before committing itself to any major increase, even as it reaffirms PEPP's role in supporting underlying inflation dynamics. It could though indicate it will pick up the pace, if not the volume, of purchases.

FISCAL REMINDER

This week's meeting could also see a decision to renew the additional EUR120 billion envelope added to the ECB's pre-Covid asset purchase programme in March, which is due to expire at the end of the year, sources told MNI.

Lagarde is likely to issue a reminder to Brussel policymakers of the need for timely and large scale fiscal support, while reiterating the ECB's dissatisfaction with inflation undershoots and its readiness to do whatever it needs to reach its inflation target of close to, but below 2%, alongside a reminder that the ECB has more than one tool at its disposal.

The ECB president could face questions about what appears to be growing support among a section of central bank governors for transferring some of the flexibility enjoyed by PEPP to the older APP - though this would run into opposition from other Council members. Another focus of attention will be the ECB's strategic monetary policy review, which, sources told MNI, is already influencing decisions.

The Governing Council is also likely to consider tightening credit standards and the level of the euro, although most members seem relatively unconcerned by the currency's recent strengthening for the time being.