ECB Set To Expand, Extend PEPP – Analysts
ECB headquarters in Frankfurt.

- No change expected for interest rates

- Economists see ECB boosting PEPP by EUR 500bln

- PEPP set to be extended into 2021, according to analysts

- Sharp reductions in economic projections likely

- German central bank under pressure from court ruling

- Rate decision due at 11.45 GMT Thursday; press conference set for 12.30


By Eric Culp

European Editor, LiveSquawk News



Frankfurt, 2 June 2020 (LS NEWS) – Economists say the European Central Bank will add a half a trillion euros to its Pandemic Emergency Purchasing Programme (PEPP) and extend the scheme into 2021 amid concerns the Eurozone economy could contract by up to 10pct or more this year.


The ECB Governing Council’s two-day meeting is set to commence Wednesday, and policymakers are expected to hold interest rates at current levels as they drastically boost quantitative easing measures designed to support Eurozone economic activity slowed by Covid-19 lockdown restrictions.


GDP in the single-currency area fell a record 3.8pct in the first quarter, and many economists along with the ECB have said the contraction in the current three-month period will likely be even worse.


At its last rate decision meeting in late April, the bank reduced the lending rate available for its long-term TLTRO III bank refinancing operations to -1pct and introduced seven non-targeted refinancing operations called PELTROs


The bank also underlined its willingness to expand the PEPP if required, and during April’s following-on press conference, ECB President Christine Lagarde noted that the programme could be stretched into next year if needed.


It now looks like both are about to happen.


“We expect the ECB to increase the PEPP by some EUR500bln [and] to extend the programme to mid-2021,” ING Chief German Economist Carsten Brzeski said, echoing the sentiment of many analysts. “Also, following the principle of the earlier collateral easing, the ECB could also decide to include so-called 'fallen angels' into the programme, announce that the proceeds from PEPP will be reinvested, and could take another look at the tiering system.


“In the end, the ECB will have to balance doing more now (perhaps with one last big push) with continuing speculation about its ability and willingness to do more in the future.”


Others were less sure of moves to increase and lengthen PEPP coming as early as Thursday.


Investec warned that policymakers may delay the expansion and extension because of an ongoing row between the German Constitutional Court and the EU high court over whether the Bundesbank, the German central bank, can continue to buy assets as part of a QE programme introduced before PEPP.


It said, “The latest figures from the ECB show that it has purchased EUR211bn of bonds under the PEPP, leaving some EUR500bn remaining of the initial EUR750bn envelope. At the current weekly pace of EUR20-EUR30bn, the ECB is set to reach the EUR750bn total by the end of October, which to our minds would leave a decision on increasing the size of PEPP set for September’s governing council meeting […] although a decision could be made earlier if necessary.”


“Sure, they could wait until September, when hopefully the real shape of the recovery will be clearer,” Brzeski noted. “However, the fact that the PEPP will be exhausted by October, at least at its current pace, could quickly lead to unwarranted speculation in financial markets. Pre-emptively denting such speculation would argue for a June decision.


“Also, PEPP is currently the easiest way to keep the Bundesbank on board, despite the German Court's ruling, and the deviation from the capital key could be easily tackled by increasing the overall size of the programme.”


Lagarde will likely face questions from the media about the EU-German rift during Thursday’s press conference.


Inflation, growth concerns continue


Lagarde said in April the ECB’s worst-case scenario predicts a Eurozone GDP contraction of 12pct this year, and she noted recently that the bank had already jettisoned rosier forecasts for 2020. The annual rate of euro-area consumer price growth fell to a four-year low of 0.1pct in May, dragging it further away from the ECB’s target of near but below 2pct.


The faltering of both economic measures will likely be apparent in the ECB’s latest macroeconomic projections due Thursday. Flagging growth and inflation increase the probability of further monetary easing from the Eurozone’s lender of last support, economists said.


In March, the ECB estimated 2020 Eurozone growth at 0.8pct.