Fidelity: ECB's steady hand sends clear dovish message

Fidelity: ECB's steady hand sends clear dovish message

ECB
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At its June meeting, the ECB confirmed the ‘significantly higher’ pace of PEPP purchases relative to early 2021, as per its commitment made in the March meeting. Below are the comments on today’s ECB meeting by Anna Stupnytska. She is Global Economist at Fidelity International.

Despite the significant acceleration in the pace of the vaccination campaign since the last meeting and much improvement in the data as the economies re-open, the ECB is sending a clear message they are not ready to withdraw support just yet.

While the ECB has revised up its growth and inflation forecasts for 2021 and 2022 and changed the risk assessment to 'broadly balanced', it remains downbeat on prospects for inflation which moves further away below the target over the forecasting horizon.

This outlook for subdued inflationary pressures after the pandemic will provide legitimate justification to the ECB to remain dovish beyond 2021.

Today's decision to keep a ‘steady hand’ stresses the ECB's determination for easy policy particularly in light of some further easing in financial conditions over the past month. With some COVID-related uncertainties remaining, the economy is clearly still in the 'pandemic territory', with continued international travel restrictions posing risks to the much-hoped-for tourism season this summer.

Moreover, with the Fed poised to maintain the current level of accommodation for the time being, there is no first mover advantage for the ECB, especially in light of potential implications for the currency.

Looking ahead, we believe that in the environment of stronger growth and inflation induced by re-opening later in the year, markets are likely to continue testing ECB's (and Fed's) determination to keep extreme policy accommodation in place.

The key test for the ECB will be the decision on when and how to withdraw PEPP which is now in place 'at least until March 2022', without causing market stress. With APP currently lacking PEPP's flexibility attributes, that handover of purchases to APP might be problematic. We expect the ECB to lay the ground for that move when it announces the results of its strategy review in H2 2021.