Before ECB decision: Confirmation of policy easing?

In general terms, the president EBCChristine Lagarde appears to be leaning towards easing politics. If investors expect significant revisions to the guidelines on the future policy of the ECB, they may be disappointed. Given the rapidly changing economic outlook due to the spread of the Delta variant, which currently prevails in most Member States, and the risk of unexpected scale of inflation, there is a strong possibility that the ECB will delay announcing any policy changes until more data after the end of the summer season. Should circumstances so require, the new policy framework may give the Governing Board more flexibility to act swiftly at the next meeting on 9 September.

About the Author

Christopher Dembik - French economist of Polish origin. Is a global head of macroeconomic research at a Danish investment bank Saxo Bank (a subsidiary of the Chinese company Geely serving 860 HNW customers around the world). He is also an advisor to French parliamentarians and a member of the Polish think tank CASE, which took first place in the economic think tank in Central and Eastern Europe according to a report Global Go to Think Tank Index. As a global head of macroeconomic research, he supports branches, providing analysis of global monetary policy and macroeconomic developments to institutional and HNW clients in Europe and MENA. He is a regular commentator in international media (CNBC, Reuters, FT, BFM TV, France 2, etc.) and a speaker at international events (COP22, MENA Investment Congress, Paris Global Conference, etc.).

What DO NOT to expect?

• No major changes are to be expected in the context of the guidance on future interest rates. Perhaps it is too early for the ECB to commit to lowering long-term rates, unless there is a significant change in the macroeconomic forecast. So far this has not happened.
• The ECB should move away from emphasizing the role of the euro in relation to inflation and / or from actively pursuing a depreciation of the euro. For example, the euro / dollar exchange rate is currently far from the negative threshold for the euro area economy.
• Any changes to the Targeted Longer-Term Refinancing Operations (TLTROs) (extensions and / or relaxation of their conditions) are not an option at this point in time.

What can you expect?

• The ECB should significantly clarify the wording used in the guidelines, in particular the definition of an end to the Covid-19 crisis.
• The ECB should maintain its cautiously optimistic outlook for economic recovery in the euro area, taking into account the downside risk related to the spread of the Delta variant. Our baseline scenario remains the same: in late 2021 and in 2022, growth and inflation are likely to surprise the ECB to the upside, as has been the case so far this year.
• The ECB has the potential to link the asset purchase program (APP), which is expected to end shortly before the first rate hike, to a new inflation target of "2%" more clearly. According to most forecasters, the first rate hike is initially planned for the end of 2022 - the beginning of 2023. The market would interpret this as a clear easing of the policy towards extending accommodative monetary support.
• The ECB can once again confirm that the unconventional monetary policy measures are starting to be conventional and fully fit into the standard political framework. After the ECB published its strategy review on July 7, this attracted few investors. However, this is important as it means that the ECB can mobilize unconventional monetary policy measures more quickly if economic or inflation forecasts so require.

How far can the ECB go?

Regarding sentiment behind the scenes, we predict that the debate between the supporters of easing and tightening the policy on the future of bond purchases will be very fierce, similar to the situation at the ECB meeting in June. Christine Lagarde recently suggested that the current pandemic emergency purchasing program (PEPP) will be "transitioned to the new format". In our opinion, ECB members agree that the implementation of the PEPP will last until March 2022. However, it is not clear how much support Lagarde will be able to obtain in replacing the PEPP with a new program whose format, implementation period and purpose have not yet been clearly defined. Certainly, more guidance on what the ECB is ready to take and can take will not emerge until early 2022, given that tightening-up supporters are a minority in the Governing Board. Two other factors that will play a key role in the context of the future of bond purchases are the result of the federal election in Germany on September 26 and the pace of the euro area return to pre-crisis levels - at this point it is estimated that this will take place in early 2022.