ECB preview: the case for new action - ING

Carsten Brzeski, the Global Head of Macro for ING Research, believes that the eurozone economy needs fresh support to get through the second lockdown and to start a recovery next year. However, this is not a crisis in which monetary policy is the main actor but fiscal policy. 

"The ECB is very well aware of this situation and knows that excessive new monetary stimulus will hardly be a gamechanger for the economy. Therefore, and even if the ECB might formulate it differently, the ECB has in our view two main objectives: (i) provide enough cheap liquidity so that the eurozone recovery can unfold once the vaccine will be rolled out; and (ii) prevent a new euro crisis from unfolding on the back of widening bond yields."

"With all of the above in mind and also assessing recent official speeches and interviews, we expect the ECB to decide on the following next week:

• An increase in the PEPP programme by up to 500bn euro to extend this programme until the end of 2021
• An increase of the monthly APP purchases from 20bn euro to 40bn euro, open-ended
• An extension of the generous TLTRO interest rate by six to 12 months
• An increase in the tiering facility to exempt a greater part of the banks’ liquidity from the negative deposit rate
• Potentially, including so-called Fallen Angels (corporate bonds downgraded during the crisis) into the corporate bond purchasing programme."

"The aim of all ECB measures will be to extend the current very accommodative monetary stance, rather than increasing it. This current crisis is a crisis in which fiscal policy, not monetary policy, can make the difference for the economy. Therefore, while still vague enough to keep the door open, Christine Lagarde will try to signal next week that this new round of monetary action will really be the last one."