Monex: Despite increasing risks, ECB shall stick to its course

Monex: Despite increasing risks, ECB shall stick to its course

19 januari 2021

ECB
ECB.jpg
By Ima Sammani, FX Market Analyst at Monex Europe.
   
The European Central Bank is set to stand pat on Thursday despite the recent risks to its economic projections due to the deteriorating virus situation and recently tightened/ extended lockdown measures throughout the eurozone.
ECB President Christine Lagarde should provide an update on the euro area economic outlook at the press conference, while expecting to receive questions on the current accuracy of the December projections. Since the December meeting, the largest eurozone economies tightened lockdown measures further and extended them well into Q1 as the third wave is putting increasing pressure on healthcare services. On Wednesday last week, Lagarde stated the latest projections are still “very clearly plausible”, despite numerous banks having downgraded their eurozone forecasts this month in response to the latest Covid-19 conditions. The ECB’s December projections consider a base case scenario in which lockdowns in Q1 2021 would be no more severe on average than throughout Q4 2020, however, just a couple days after these projections were published, the virus data deteriorated.
Increasing the size of the PEPP envelope seems less effective and necessary, as the central bank has only purchased slightly more than €750bn under the scheme of €1.85tn. The PEPP, which has been extended to March 2022 in the last meeting, now consists of €15bn worth of purchases a week. Even if the purchases would be increased to €50bn a week for the entirety of Q1 and then reverted back to €15bn a week, this would not exhaust the PEPP envelope under the current mandate.
The medium-term outlook remains unchanged as the vaccine rollout in the eurozone has kicked off and should facilitate a gradual easing of restrictions in the coming quarters. Ample fiscal support should also help prevent another GDP dip in the medium-term. The ECB won’t publish fresh forecasts until March, but Lagarde may signal on Thursday that downward revisions could be on the cards next week.

Gerelateerde berichten