MNI PREVIEW: ECB To Stress Vigilence, Focus On Euro

The European Central Bank will reiterate its continued vigilance in the battle to contain the economic effects of the coronavirus pandemic following its Governing Council meeting on Thursday, but while investors will be alert to any reference to concern over the strength of the euro, no policy changes are expected.

While senior ECB figures have recently talked down the strength and sustainability of the eurozone's Q3 recovery, in words which some analysts have ascribed to an attempt to talk down the currency's gains against the dollar, any such move as rate cuts, a change to the tiering multiplier or re-pricing of the ECB's pandemic emergency or and targeted longer-term refinancing operations appear to be off the table.

But, with further monetary easing expected in the coming months, Lagarde will once again strike a highly dovish tone, and attention will focus on whether euro strength was raised by council members. Chief Economist Philip Lane has recently remarked that disinflationary pressures are likely to outweigh any inflationary forces, while fellow executive board member Isabel Schnabel said that strong growth rate "doesn't mean so much" following two quarters of very negative performance.

Risks continue to be tilted to the downside, with little room for complacency given recent rises in infection numbers. But President Christine Lagarde will seek to reassure markets that recent negative inflation data, and some likely downward revisions to eurosystem staff macroeconomic projections are not indicative of a more worrying trend.

READINESS TO EXTEND PEPP

A cut in German value-added tax and delays to summer sales in some European countries are likely to be cited as factors contributing to a quarter-on-quarter decline in GDP of around -13%. There is little as yet to suggest any significant deviation in the path of recovery from the ECB's established base case scenario.

Still, Lagarde will emphasise her readiness to both extend and make full and flexible use of the ECB's EUR750 billion pandemic emergency purchase programme should the need arise. Recent remarks by individual governors about the need to think of an exit strategy are unlikely to have much influence over the Governing Council's deliberations for now.

With the Federal Reserve's recent shift to average inflation targeting, the ECB's strategy review will also come under the spotlight. Lagarde will likely restate her willingness to examine its results with an open mind, amid suggestions additional focus could be placed on the Bank's secondary mandate to "support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union," including "full employment" and "balanced economic growth" so long as the primary objective of price stability is not compromised.

With a coordinated European fiscal response in the offing, Lagarde will also stress that Covid-19 remains primarily a crisis for health and fiscal authorities, and not one of monetary policy.