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--June May Be Too Soon For Some On GC To Extend PEPP
By Luke Heighton
FRANKFURT (MNI) - The European Central Bank will ponder further policy
easing at its June meeting, amid signs the tentative opening of economies across
the eurozone is helping put a floor in place for the start of the recovery. But
for many policymakers this week could be too early to commit to further
With the European Commission debating its own rescue package to complement
the central bank's action of the last two months, some Governing Council members
worry the ECB risks doing too much too soon and Thursday might see mere tweaks
to the substantial measures already announced.
Here are the key themes to look out for:
Most economists see the ECB increasing the Pandemic Emergency Program by an
additional EUR500-750 billion. However, although there is broad agreement within
the Council that PEPP will need to be expanded at some point, not everyone
agrees that now is the time to do so, with several Eurosystem sources insisting
to MNI that the ECB should keep its powder dry until later in the year.
Forward guidance could be strengthened, indicating PEPP will run for
longer, or by linking it more explicitly to incoming growth data.
Reinvestment of principal payments from the PEPP is generally assumed to be
inevitable, with little to no opposition on the Council. It may be formally
announced at the June meeting as a place holder, laying down that the ECB
intends to reinvest long after outright PEPP ends. This will allow the ECB to
signal both the temporary nature of the PEPP, whilst also setting out that it is
in this for the long haul
Fallen angels are already eligible as collateral, but have non-investment
grade debt has not yet been included in the ECB's QE operations. That could
change, but probably not before the issue of increased risk to the central
bank's balance sheet has been discussed.
Not currently seen as a major transmission mechanism, there is currently
little appetite on the GC for cutting benchmark rates. A change in the tiering
multiplier may, however, prove attractive, complemented as it already is by the
hugely attractive terms offered under the ECB's TELTRO and PELTRO programmes.
Policymakers could address the issue of proportionality, taking on the
German Constitutional Court's ruling head on. Although adamant it is subject to
EU and not national laws, the ECB will use its communications to underline both
the temporary and proportional nature of its current policy mix.
Mention may also be made of the strategic review, which, while on hold, has
begun to resurface in interviews and speeches by some ECB and national central
bank officials, not least when defending the ECB against the charge of monetary
financing arising from PSPP and, potentially, PEPP too.
Quarterly staff macroeconomic projections are due and will offer the most
thorough internal analysis yet of the full scope of the Covid-19 crisis since
the ECB published its alternative scenarios for economic activity in early May.
Many will be looking to see if the outlook is closer to the medium scenario
of an 8% decline in annual GDP in 2020 or the 'severe' case of a 12% decline and
one MNI source suggests we may have a 'positive surprise'.
The forecasts will also confirm that deflation, not inflation, will be a
bigger risk for the ECB over the next 12 months.
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