Christine Lagarde, President of the European Main Bank, speaks to the media following a meeting of the ECB governing board at ECB headquarters on March 12, 2020 in Frankfurt, Germany.
Thomas Lohnes
The European Pre-eminent Bank (ECB) is expected to increase its coronavirus crisis asset-purchase program at this week’s meeting, amid fears of abatement inflation and the steepest economic contraction since World War II for the euro zone.
In March, the ECB unveiled its Pandemic Emergency Advantage Programme (PEPP), which will see it buy 750 billion euros ($819 billion) in euro zone government contracts this year. Analysts are now expecting it to increase that number.
“We see a 60% probability that the ECB will raise its asset attain target on Thursday, probably by 500 billion euros,” Florian Hense, from Berenberg Economics, wrote in an analyst note.
“In the doldrums staff projections for growth and inflation will make it easy to justify such as decision.”
Staff projections for inflation and profitable growth are also likely to be downgraded this week, at least in the short — and perhaps the medium — term.
“(ECB President) Christine Lagarde’s criticisms suggest that the ECB will adopt a baseline forecast for euro area growth somewhere between its medium and sparse scenarios — in other words, around -9% in 2020, 5% in 2021 and 3% in 2022, with headline inflation at 0.3%, 1.0%, 1.5%, severally,” Frederik Ducrozet and Nadia Gharbi, from Pictet Wealth Management, wrote in a note.
Lagarde has stressed multiple times that the pre-eminent bank cannot be the “only game in town” and might welcome the ambitious European Commission proposal for an EU recovery assets and the fiscal measures taken or discussed across the euro area.
But despite this fiscal response, the ECB is unlikely to discourage inactive, as it faces the risk of low inflation turning into deflation and the fragmentation of the euro area.
“Concerns about deflation peril featured more prominently in the account of April’s policy meeting,” wrote Ken Wattret, chief European economist of IHS Markit, in a report in investigate. “It was highlighted that since the start of the coronavirus pandemic, the likelihood of inflation being below zero had increased in essence according to option-implied probabilities, pointing to a significant risk of deflation.”
In addition to an increase of the PEPP purchase volume, the ECB has other selections. It could change the terms of its tiered interest rate system to be more generous, and could start detailed communication upon the reinvestment policy attached to the PEPP program. On top of that, it could also hint at enlarging the asset pool to contain credit below investment grade, commonly referred to as “junk” bonds.
“Whatever the ECB does at its regular Governing Panel session on June 4 will count more as a signal than a genuine economic stimulus,” Berenberg’s Hense added.
“However, signals count. Especially in times of heightened uncertainty.”
Correction: A quote in this story has been updated to on that the ECB is expected to increase its stimulus by 500 billion euros.