ECB: More interesting with COVID-19 cases rising sharply – JP Morgan

Analysts at JP Morgan offer a detailed preview on what to expect from the European Central Bank (ECB) monetary policy decision due this Thursday, in light of the recent surge in coronavirus infections in the Old Continent.

Key quotes

“With COVID- 19 infections rising sharply … ECB meeting has become much more interesting. This is not because much is expected in terms of actual decisions. In fact, we still think that there is only a chance of some changes to TLTRO-III modalities and tiering multiples. 

Instead, the meeting will give the ECB an opportunity to take stock of the recent data and COVID-I9 news, and possibly offer some guidance about the December meeting when new staff forecasts will be available. 

We continue to think that the ECB will in December announce an expansion of PEPP by another E500bn and that it will have to follow this up in mid-2021 with another increase of E250bn. 

The ECB will obviously sound much more concerned about the economy… But there is still a huge amount of uncertainty about the near-term outlook and therefore the ECB may also play for time. 

First, 3Q20 GDP estimates will be published one day after next week’s meeting and will be important for assessing the extent of the recovery ahead of the acceleration in new infections. 

Second, the next few weeks will show if current containment measures are working and if more is needed. The news on governments’ responses is moving very quickly. 

Third, the outcome of the US election and Brexit negotiations will also matter ahead of the ECB’s meeting in December. 

Fourth, the ECB still has a lot of spare capacity within the current PEPP envelope, with purchases lasting until mid-2021 at the current pace, and it still has further TLTRO-Ills lined up. 

For all these reasons, the ECB may refrain from sending a very clear signal about December, even if it does suggest that some further support will come. In this context, the meeting will offer ECB policymakers a chance to discuss the fundamental policy strategy, given that there still seems to be a lot of disagreement about Philip Lane’s two-step approach to inflation. “

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