The European Central Bank isn’t done expanding its bond-buying programme yet, according to economists, despite recent remarks by policy makers that the outlook has brightened slightly.
More than half of respondents in a Bloomberg survey predict an increase in the ECB’s €1.35tn pandemic purchase programme ($1.5tn) by December, with most expecting an extension and a top-up of €500bn. The Governing Council is seen keeping its policy unchanged when it meets next week.
Expectations that the ECB will need to do more highlight the extraordinary uncertainty surrounding the recovery from the crisis. While officials have said the latest data point to a relatively sharp bounceback, they also stressed the eurozone economy is still on course for its biggest contraction ever — almost 9% this year — and the extent of damage to companies and labor markets is still hard to judge.
Only this week, the European Commission came out with a bleak assessment, warning that the risks remain “exceptionally high and mainly to the downside.” It also argued that a widening gap between richer and poorer countries is a “powerful illustration” for why joint fiscal support is key.
“It is far too early to give any all-clear on the economy,” said Carsten Brzeski, chief economist at ING Germany. It will take more data “before a better picture of the shape of the second stage of the recovery will emerge. This second stage of the recovery will determine any next steps for the ECB.”
“The emergency aid seems to be working. With plenty of assets still to buy, there’s no need for a new policy announcement next week. And with the fire-fighting over, the central bank can now turn to the recovery phase of the crisis,” said analysts Maeva Cousin, David Powell and Jamie Rush.
President Christine Lagarde signaled in a Financial Times interview this week that she’s in no rush to ramp up stimulus again as the ECB allows current measures to unfold. Policy makers added €500bn to their crisis bond-buying plan in June and extended it by six months to the middle of next year.
Another such push would lift total holdings — including earlier purchases — to just under €5tn, equivalent to about 40% of 2019 output. Waiting with any announcement until December would give policy makers a chance to look at their first set of economic forecasts for 2023.
Investors the world over are questioning how deep central banks will need to dig into their toolbox. The Bank of England increased its asset-purchase programme last month but slowed the pace of buying, while some Federal Reserve policy makers are expressing concern that the resurgence in US virus cases will derail the recovery there.
Economists in the survey predict the ECB will halt emergency purchases by the end of 2021. They also expect it to hand banks another 240bn in long-term loans this year, and said a worse-than-anticipated recession in the euro area is still one of their key concerns.
“After the ECB significantly boosted the Pandemic Emergency Purchase Program, the discussion will now center on the implementation,” said Kristian Toedtmann, an economist at DekaBank. The “most immediate” question officials may have to address, he argued, is how flexible they can be in allocating purchases across the region.
Rules that stipulate buying must be proportionate to the size of individual economies, so-called capital-key guidelines, have proven contentious among policy makers. Some including Bundesbank President Jens Weidmann have highlighted the importance of rebalancing the ECB’s portfolio after purchases were skewed towards weaker economies. Others including France’s Francois Villeroy de Galhau have argued the capital key is an “uncalled-for constraint” that could undermine the effectiveness of monetary policy.
The issue will likely remain a point of debate, and at least until governments have signed off on borrowing jointly on financial markets — an initiative that would ease the burden on national budgets, contain bond yields and alleviate pressure on the ECB to intervene.
European Union leaders will meet July 17-18 to try to agree on their proposed €750bn recovery fund, a groundbreaking program funded by joint debt. Some members are still quibbling over key aspects, meaning the plan could still be watered down or fail.
“Downside risks dominate and the uncertainty regarding the recovery is very high, not least due to the still-unclear fiscal spending outlook,” said SEB strategist Lauri Halikka.
“Lagarde will push for a prompt adoption of the EU-wide fiscal plan at the press meeting.”
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