Yahoo Finance ECB set to give Europe's ailing economy a shot in the arm
The European Central Bank is almost certain to give Europe’s faltering economy another boost on Thursday when it delivers its December policy decision.
The central bank is expected to leave interest rates unchanged but overhaul its roster of unconventional monetary policy tools to help support Europe’s economy. While no major new stimulus is expected, central bank watchers think the ECB will extend and relax key COVID-era support programmes to give the market more certainty about the future.
“We... think that this week’s policy recalibration will focus on the duration of policy support, rather than easing financial conditions further from here — an important shift in the ECB’s pandemic reaction function,” economists at Goldman Sachs wrote.
At the ECB’s last policy meeting in October, Lagarde and her colleagues left policy unchanged but said the outlook for Europe’s economy was worsening. The second wave of COVID-19 was sweeping Europe, forcing economically damaging lockdowns.
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Lagarde said in October the ECB would hold fire until new economic forecasts were drawn up for December’s meeting. The governing council’s statement said policy makers would respond “as appropriate... to the unfolding situation” but Lagarde was much more forthright in comments made at a press conference after the announcement.
“We will be looking at everything,” she said. “Don’t assume it will be one instrument — we’re going to look at all of them.”
Investors took her comments to mean that action was almost certain at the December meeting and could be wide ranging.
“Lagarde de facto pre-announced new ECB action next week,” Carsten Brzeski, ING’s global head of macro, wrote in preview note.
While a rate cut would be a surprise, consensus sees the ECB extending the life of economic support programmes, such as the pandemic emergency purchase programme (PEPP) which is currently due to run until the end of June.
Economists think the ECB will also add €500bn (£453bn, $606bn) of firepower to the programme, taking the total PEPP envelope to €1.85tn.
Other options on the table include another round of TLTRO — long-term loans to banks aimed at supporting lending into the economy.
Such measures would mostly serve to calm nerves by signalling that the ECB will extend support for as long as the eurozone needs to get back onto its feet.
The backdrop will be darker forecasts from the central bank’s own staff. Fresh macroeconomic projects are set to be published alongside the policy decisions. They are likely to show a downgrade on the last set of forecasts made in September.
“Growth has slowed notably on the back of the November lockdowns and inflation has moved sideways at subdued levels,” Goldman Sachs said.
“We therefore expect the staff projections to show a longer acute pandemic phase than anticipated in September with lower growth and inflation in 2021.”
Forecasts prepared in September had GDP falling by 8% this year before rebounding 5% in 2021. The OECD last week said eurozone GDP would fall by 7.5% this year but rebound by just 3.6% next year.
While the short-term outlook faces a downgrade, analysts at Goldman said the ECB’s governing council would probably flag that recent positive news about COVID-19 vaccines reduced the uncertainty in the long run.
The ECB will publish its latest monetary policy decision at Thursday lunchtime, followed by a press conference led by president Christine Lagarde.
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