MNI PREVIEW: ECB PEPP Top-Up On Agenda; Staff Projections Due

--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

accommodation.

     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:

     --PEPP:

     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.

     --REINVESTMENTS

     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

     --JUNK BONDS

     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.

     --INTEREST RATES

     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.

     -- PROPORTIONALITY:

     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.

     --STRATEGIC REVIEW

     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.

     --STAFF FORECASTS

     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.

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

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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