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ECB: POV (Part 2): If the ECB were to ease policy at this meeting, this would
most likely take the form of an expansion to the PEPP given that it is the most
flexible tool available for supporting the recovery, preventing a disorderly
tightening of financial conditions and maintaining the smooth operation of the
monetary transmission mechanism. Given that the economic recovery could prove
anaemic and protracted (particularly in the periphery where the impact of
coronavirus has been most severe), the ECB will likely need to bolster the
purchasing capacity of the PEPP in the future to support the increase in
sovereign issuance that is coming down the pipeline. Doing so now would allow
the ECB to get ahead of the curve and signal a commitment to maintaining an
accommodative monetary position.
- There is also a chance of some easing of TLTRO conditions to spur lending and
prevent the recovery from being choked off before it has gained momentum. The
probability of a further deposit rate cut at this meeting is quite low given
pre-existing concerns about deeply negative policy rates and the efficacy of
further marginal cuts in the face of an unprecedented economic contraction.