Keep full throttle, but not more

As we expected, the ECB has left its press statement and thus also its forward guidance (except for five words) unchanged. Accordingly, the markets have reacted rather cautiously. The purchasing programs and liquidity measures are continuing at full speed. Nor was it necessary to inject nitrous oxide for even more horsepower. The economic data are within the range of the ECB’s baseline scenario, which is why no adjustments to monetary policy are yet necessary. The ECB will keep this in check should the pandemic cause further, unforeseen economic damage. In principle, however, we assume that the ECB will have to make further adjustments to its purchasing programs by the end of the year (PEPP expires in the summer of 2021) in order to provide further support via the credit channel for the economy, which will still be weak next year.

Lagarde also confirmed this prospect in the press conference, emphasizing the continuation of the current monetary policy due to the high uncertainties and weaknesses in the economy. The fact that Lagarde in her assessment for the first time since January 2018 brought the Euro and its effect on monetary policy back into play had not been expected so concretely. The statement from the ranks of the ECB that there was no reason to overreact, however, calmed the markets.
The new growth and inflation projections had hardly been changed at all, but rather with adjustments to the decimal place. Basically, the ECB is signaling that it will continue to supply the markets with liquidity medicines for a long time to come, but based on this outlook, no stronger dose is necessary. Here it has also referred to the fiscal programs of the EU states, which it even explicitly celebrates. Perhaps also against the background that the ECB is not running out of raw material for government bond purchases.

With regard to the Fed’s recent adjustment of its inflation target and whether this would affect the ongoing review of the ECB’s monetary policy, Lagarde referred, as expected, to the still ongoing investigations, but also said that it was to be expected that the inflation target would be the central variable for monetary policy. Given the many structural factors that keep inflation low, it is not surprising that the ECB will probably move to a fundamentally more expansive monetary policy – if that is still possible at all.


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