No surprises before the summer break

In line with our expectations, the European monetary authorities did not decide on any changes to the monetary policy stance at their Council meeting today. The ECB will continue to buy bonds under the Pandemic Emergency Purchase Programme (PEPP) until at least the end of June 2021. Even though individual guardians of the currency expressed their unease about the flexibility of the PEPP in advance of the ECB’s deliberations, no adjustments to the framework conditions were anticipated. Securities purchases under the Asset Purchase Programme (APP) will also continue as planned. In view of the uncertainty surrounding the economic outlook, the currency watchdogs believe that a comprehensive monetary policy stimulus is still required.

In the course of the press conference, Ms. Lagarde stressed that the central bank is likely to exhaust the announced PEPP purchase volume of EUR 1,350 billion. In doing so, the ECB chief is sending a „dovish“ signal and opposing Council representatives who recently speculated that the PEPP framework would not be fully utilized. Lagarde believes that only if the European economy were to recover surprisingly strongly would bond purchases on a smaller scale be conceivable. The supreme monetary watchdog has stressed that the flexibility of the PEPP is of particular importance in order to counteract possible fragmentation in the euro area. A deviation from the capital key would therefore not be an obstacle to implementing the envisaged monetary policy measures.

The securities purchases and tender operations have led to the surplus liquidity in the euro area having meanwhile increased to almost EUR 2,800 billion. Core European banks in particular have been affected by the ECB penalty rate. Speculations about an adjustment of the tiering factor have not materialised. However, the head of the ECB has conceded that this is quite possible in the future. So far, however, the Governing Council of the ECB sees no need for action in this regard. Should insolvencies increase in the autumn and the burdens on the banking sector increase, we consider an adjustment of the allowance to be quite conceivable. During the summer break, the monetary watchdogs should keep a close eye on the development of the European economy. If the economic trend should fall short of expectations, the ECB could well increase the monetary stimulus, especially the PEPP volume, again in the autumn.

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