June 04, 2021 | 13:51
ECB Preview: Prepare to be Disappointed
The ECB’s monetary policy meeting on June 10 is key. This is the meeting where the central bank will give a “thorough assessment” of financing conditions and the inflation outlook and decide on the pace of asset purchases under the PEPP, which was stepped up in March. The plan was to review the “significantly higher” pace on a quarterly basis. That brings us to June, when the Governing Council will have updated economic forecasts in hand and an early glimpse of activity as restrictions are slowly lifted. We expect upgraded forecasts for growth and inflation and they, along with a faster rate of vaccinations, present a clear case to slow the bond buys moderately, at least from the PEPP. In fact, slower purchases in the emergency program can be offset by raising the monthly purchases from the APP.
However, any changes to policy are highly unlikely as all ECB officials have relayed the same message over the past month: it is too early to map out an exit, too early to slow things down, and that continued policy support is still needed. And, President Lagarde proclaimed in early June that “strong policy support” will be there “well into the economic recovery.” She may even borrow some wording from the Fed… emphasize that yes, things have improved, but they are not there yet, and it will take time before substantial further progress is seen. And, the ECB head may also borrow an adjective from the IMF and the OECD and call the recovery “uneven”.
Bottom Line: Expect the can to be kicked to September. By then, most of Europe will be vaccinated and the Recovery Fund will be in circulation. Only then will the ECB take a step back.