La Française: Pre-ECB commentary

La Française: Pre-ECB commentary

ECB
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By François Rimeu, Senior Strategist at La Française AM

The ECB will hold its quarterly monetary policy meeting on June 10th. Please find below what we expect.

  • We expect the ECB to keep its interest rates at record lows.
  • We expect no significant change in the Pandemic Emergency Purchase Programme (PEPP) and no indication that the program will be wound down before March 2022. In terms of wording, we think that the ECB could commit to 'higher' PEPP purchases in Q3 while stressing flexibility during the summer months. Previous wording was 'significantly higher', which translates into a modest slowdown in Q3 vs Q2.
  • We expect communication on the potential end to the PEPP to be postponed to September.
  • We expect the inflation and growth outlook to materially change, reflecting the reopening of economies, the vaccination roll-out and higher commodity prices:
    • On the inflation front, the ECB previously estimated that inflation would peak in the last quarter of 2021 at 2%. We expect this figure to be revised higher, to around 2.8%. We expect Ms. Lagarde to insist that inflation pressures will prove to be temporary.
    • Changes could be less pronounced on the growth side. We expect the ECB to wait for more evidence that growth is really accelerating before revising its 4% 2021 growth target higher. Nonetheless, we expect the ECB to forecast 2021 growth at 4.2%.
  • We also expect Ms. Lagarde to communicate about climate risk and how ignoring climate risk would be dangerous for central banks.
  • Finally, Ms. Lagarde could repeat Ms. Schnabel’s communication regarding rising yields: "Rising yields are a consequence of investors becoming more optimistic and this is precisely what  we want to see."

We think that the ECB will postpone the difficult decision to September and keep all options open. Thursday’s meeting should be a non-event.