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ECB Told to Be Bold With More Cash for Recovery: Decision Guide

Piotr Skolimowski and Carolynn Look
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ECB Told to Be Bold With More Cash for Recovery: Decision Guide

(Bloomberg) -- The European Central Bank will decide on Thursday whether its already massive monetary stimulus needs to be boosted even more to help haul the region out of its deepest recession in living memory.

With President Christine Lagarde warning that the ECB’s worst-case predictions for the economy are likely to pan out, most economists expect policy makers to increase their 750 billion-euro ($842 billion) Pandemic Emergency Purchase Program and extend it beyond the end of this year.

“The ECB should opt for a bold and pre-emptive response,” said Katharina Utermoehl, senior economist at Allianz SE. “Even if it doesn’t end up having to use all the announced policy space, it’s better to create room for maneuver now to stave off market concerns.”

Follow our TOPLive blog on the ECB decision and briefing

Policy makers including chief economist Philip Lane have telegraphed their readiness to act even as the economy shows early signs of bottoming out, stressing that the damage from months of pandemic restrictions will take years to repair. Updated projections will offer a glimpse at the challenges ahead.

Lagarde will likely hail the fiscal reinforcement from a planned European Union recovery fund, as well as national governments’ initiatives. She’ll also attempt to dispel concerns that an explosive German court ruling last month will limit the scope for more monetary support.

The Governing Council will announce its decision at 1:45 p.m. in Frankfurt, and Lagarde’s virtual briefing begins 45 minutes later. Here are the issues that are set to be discussed:

Pandemic Purchases

Little more than two months into the program, the ECB has burnt through almost a third of the money supposed to last through the end of the year, suggesting it’ll exhaust its buying space around October. While that leaves policy makers with some time to decide by how much they want to increase purchases, any delay would likely spark a market backlash -- particularly in Italy, where the central bank has skewed purchases in recent weeks.

That’s why most ECB watchers expect 500 billion euros to be added to the plan on Thursday, taking asset purchases under all active programs to 1.6 trillion euros this year, a record annual amount.

Investors will also be interested in whether the institution intends to reinvest the proceeds from maturing bonds and whether it intends to start buying debt of companies that lost their investment rating due to the pandemic.

Lagarde might be asked about French Governor Francois Villeroy de Galhau’s claim that dropping a rule tying asset purchases to the relative size of individual economies would make the ECB’s emergency program more powerful.

Economic Outlook

The unprecedented shock from lockdowns of large parts of the economy and uncertainty about how quickly demand will recover in the face of increasing bankruptcies and unemployment has complicated forecasting. The ECB is leaning toward the most pessimistic of its current three scenarios, which would see annual output in the region shrinking as much as 12%.

Meantime, inflation has nearly ground to a halt, though with most of that due to plummeting energy costs and significant stimulus already planned, policy makers are likely to acknowledge that they’re short of their goal of just-under 2% without overplaying it.

Liquidity Tools

A key component of the ECB’s crisis response has been to extend short- and long-term loans to banks.

With more liquidity slushing around in financial markets, it’ll also become more challenging for lenders to circumvent the ECB’s negative deposit rate. Some economists expect the central bank to raise the amount it exempts from the 0.5% charge, a move that would particularly help German banks, which have the euro zone’s largest reserves.

Fiscal Support

In parallel to the ECB, governments across the euro area are working on fiscal-stimulus plans to restart growth. The European Commission is planning to add 750 billion euros in grants and loans, with those countries most affected by the pandemic set to receive particular help.

The ECB had for months urged governments to take the lead in engineering a recovery, and Lagarde will likely reiterate praise for higher public spending and offer reassurance that debt-financing costs will remain low.

“All countries around the world had to respond, and as a result of that had to increase their debt,” she said in her last public remarks before the Governing Council meeting. In the face of the pandemic, the “use of debt is not only recommended, it’s the way to go.”

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