STATE OF PLAY: ECB To Point To PEPP As Yield Defence

The European Central Bank could indicate willingness to use its Pandemic Emergency Purchase Programme to contain a global rise in bond yields after its meeting on Thursday, but may stop short of announcing an immediate increase in the pace and volume and purchases.

Officials will place emphasis on room for manoeuvre afforded by the PEPP's current EUR1.85 trillion envelope, and ECB President Christine Lagarde is also likely to face questions at the press conference about whether the Bank targets specific bond yields, as suggested by Executive Board member Fabio Panetta, or whether it tries to keep the whole curve down, as indicated by chief economist Philip Lane in an interview.

While the ECB says it wants to maintain favourable financing conditions, it has not defined what it means by these, so Lagarde could be asked about how closely the ECB more closely watches real versus nominal yields, as well as GDP-weighted sovereign yields or the overnight index swap curve, after divergent statements from senior policymakers.

MARCH PROJECTIONS

March's Eurosystem staff macroeconomic projections are widely expected to see a small upwards revision to the 2021 inflation outlook, while growth will be trimmed. Neither movement is significant enough to warrant a policy response, and instead emphasis will be placed on the ECB's continued faith in its baseline scenario and the importance of making continued progress on the vaccination front after a disappointing start to the process in eurozone countries.

Having described risks to the euro area growth outlook in January as tilted to the downside, although in a degree that was "less pronounced," Lagarde could again accentuate the positive, citing improving global trade and the presence of large-scale fiscal support packages in the U.S. and EU. But, with virus infections rising again in some parts of central and eastern Europe, the ECB president will stress the importance of maintaining a very loose monetary policy setting, with short-term downside risks to the fore.

Interest rates and other major policy settings are likely to remain unchanged.