The big questions that the ECB has left unsolved for this summer

Christine Lagarde and the ECB itself left unresolved the great unknowns that the current pandemic situation drags and, in addition, added some more to the labyrinth in which the largest deployment of stimuli carried out by the institution to date has become, while the inflationary pressures. Many experts were waiting for clearer guidance on when a review of the possible completion of PPEP, the sovereign debt emergency program, should take place, and are asking for a date for the review of the strategy, announced by Lagarde at the end of 2019.

The ECB has bought time, in yesterday’s meeting, before being forced to make decisions to start withdrawing the PEPP, which has a capacity of 1.85 trillion euros, or at least send a signal that the largest package of stimulus mobilized in the history of the institution has an expiration date. Market consensus is of the opinion that the trickiest points will not be addressed until September. Lagarde is taking over the ambiguity to travel through an unexplored territory such as the withdrawal of aid, without damaging the recovery, and while inflation makes an appearance, remembering that monetary policy has its limits.

“Summer will be for the pigeons,” says Jacqui Douglas, TD Securities macro chief, referring to the fact that the members of the Governing Council most in favor of keeping the measures adopted intact have temporarily won the game against the hawks, which already they had warned that it was time to think about tightening monetary policy. “Lagarde prepared us for a more aggressive turn in September,” says the expert.

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“We are going to continue purchasing at a significantly higher rate than during the first months of 2021, we are going to do that in the next three months according to market conditions and we are going to do it with the core attribute of PEPP, which is flexibility in all asset classes, flexibility in time, flexibility in geography, “Lagarde explained at the insistence of journalists to seek specificity.

But the discussion about whether there was debate to reduce purchases remained unresolved. “There was debate about the rhythm of purchases, about some analytical aspects in the use of our instruments, that’s why I use the words of agreement. There were here and there a couple of points of divergent views and there was no unanimity in all areas “.

The big problems remain largely unsolved, comment from Bank of America. “The orientation is still short,” they indicate in a note to clients. The PEPP’s time horizon is set until March 2022. But the ECB has been modulating its message. The end of the pandemic program has been linked, consider the bank over the coronavirus crisis. “Any discussion about leaving the PEPP would be premature, it is too early and will come in due time,” Lagarde repeated. He even went as far as saying that it has not been addressed.

The debate about what the French banker said focused on the volume of purchases. The ECB is in the habit of slowing down bond purchases during August so as not to distort the market in the face of the fall in volume that occurs in the summer period. According to Bloomberg, some members wanted to accelerate purchases in July and September to compensate for a weaker August, while others wanted to reduce average volume while maintaining financing conditions.

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“Maintaining the significantly higher pace of PEPP purchases over the summer makes sense, in our opinion, in terms of risk management and is a moderate measure,” says Apolline Menut, Eurozone Economist at AXA Investment Managers .

“The September meeting could be interesting as the ECB plans to finalize the strategy review around that date and will probably start communicating the PEPP strategy for 2022,” said Konstantin Veit of PIMCO.

The strategic review became another of the big issues to be resolved by Lagarde yesterday. And yesterday she was asked if it will be the guide for the PEPP or the strategic review first. Bank of America experts indicate that “the timing and outcome of the strategy review” is unknown, which means an increase in nervousness for the market, which “will probably appear during the summer holidays.”

“We are still in the review process,” Lagarde explained yesterday, arguing that the works were suspended by the covid. “I hope that we can give the result of the review of the strategy in the second half of the year,” he said.

It did not provide any clarity on the outcome of the strategy review, “says Menut, who notes that” we believe that the central bank should address the ambiguity of its definition of price stability to make it clear that it is adequately symmetric “and, thus, allow “a certain overshoot of inflation, necessary to re-anchor long-term inflation expectations at 2%.” In the absence of a clear strategy, inflationary pressures play in favor of the hawks and the risk of assuming a withdrawal premature stimuli, indicates the AXA expert.

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For this reason, some experts were surprised by the strong upward revision of growth. Arguments were offered for the message to be hardened in September. There was “a big change in growth forecasts without a clear trigger, and the link between growth and inflation was broken, and it does not play in favor of the central bank,” they say from Bank of America.

For David Kohl, Julius Baer’s chief economist, “underlines that the ECB considers that the current rise in inflation is temporary and is not a reason to discuss the tightening of monetary policy.”

The five strategic points that the ECB will review in 2020

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