Dark days are long gone: Five questions for the ECB

LONDON (Reuters) – The European Central Bank this week will address more questions about an increasingly challenging outlook just a month after it released a new stimulus to strengthen the eurozone economy.

Policymakers increased the purchase of emergency bonds by 500 billion euros ($ 607 bln) in December. But issues of the COVID-19 recovery, new restrictions on activity in countries including Germany and France and the slow distribution of vaccines have raised doubts about the speed of recovery in the region.

“Right now, the ECB is still getting it a little bit with its back against the wall,” said Althea Spinozzi, an established revenue strategy at Saxo Bank Group. “There is no alternative but to continue to support the economy until there is a clear end to downside risks. ”

Here are five key questions for markets.

1. What does the slow spread of vaccines and the introduction of COVID-19 cases mean for the economy?

ECB chief Christine Lagarde is sticking to forecasts for economic recovery this year so that lock-in measures to prevent the pandemic will be lifted by the end of March and vaccines on the release.

She said in a Reuters interview last week that the latest ECB forecasts include some impact from restrictions. The next forecasts are expected in March. Real GDP should return to pre-crisis levels by mid-2022, minutes from the December ECB meeting presentation.

However, a lockout extension has pushed back hopes early and economists are cutting their expectations. Bank of America now estimates a 2021 growth expansion of 2.9%, a full percentage point lower than previously expected.

Markets will therefore be closely examining the ECB ‘s assessment of risk balancing and will want to understand whether further stimulus is likely to occur this year.

(Graphic: Renewed increase in COVID-19 cases in Europe -)

2. How committed is the ECB to using the full PEPP envelope?

Policymakers debated a smaller increase in the purchase of emergency bonds last month and wanted to emphasize that they may not spend the full quota.

And in December, the head of the ECB did not promise to use the full weight of the 1.85 trillion euro Pandemic Emergency Purchase Program (PEPP).

However, an uncertain outlook could lead to some dissatisfaction in markets.

“What will make markets nervous in the coming seasons is how much commitment there is to see the package through,” said Antoine Bouvet, ING’s senior bond specialist. “The kidneys insist it is not needed, I suspect they need to do more or less. ”

(Graphic: ECB pandemic stimulus program -)

3. Surely the ECB will welcome positive signs for inflation?

A key measure of the long-term inflation expectations of the euro zone, closely followed by the ECB, is near 18-month highs.

The rise comes on the heels of a temporary cut in German value-added tax, which had lowered prices, and a 50% jump in crude oil prices since November.

While signs of inflation are welcome, a weak economy will keep up pressure on prices. Analysts note that US reflation trade may also explain the expectation of euro zone inflation.

Isabel Schnabel from the ECB believes that short-term inflation increases will not have a significant impact on monetary policy decisions.

(Graphic: Euro zone inflation forecast -)

4. What about the euro?

The euro has weakened in recent days, but is not far from its highest levels since early 2018.

Analysts surveyed by Reuters are predicting a gain to $ 1.25 by the end of 2021, a 3% increase from current levels.

Lagarde has said the ECB would be “extremely vigilant” about the impact of strong currency prices. She may be asked again about the central bank’s pain threshold for frontier currency strength.

(Graphic: Euro during coronavirus crisis -)

5. Could the ECB consider yield curve control?

Pablo Hernandez de Cos of the ECB said this month that the ECB should consider a move to curve control to raise inflation.

Australia and Japan are already targeting parts of the sovereign bond loop to find loan costs. But the policy is more complicated for the ECB in that it does not have a single government bond market.

While economists expect the option to remain in the ECB toolkit, they do not expect it to be accepted any time soon.

(Graphic: Next up in output loop control: ECB? -)