Christmas presents from the ECB

The Covid 19 pandemic continues to give cause for concern. Many countries in the Eurozone are currently tightening their contact restrictions again. The growth in economic output in the euro zone is likely to be negative in the fourth quarter of this year and the first quarter of next year. For this reason, the ECB once again feels obliged to relax monetary policy once more. ECB head Christine Lagarde announced at the last ECB meeting that the central bank is preparing an extensive easing package for December. According to the ECB Chairwoman, all monetary policy instruments will be put to the test. In the wake of the press conference, some ECB representatives spoke out and even put forward new measures.

PEPP: The central bank’s sharpest weapon
We expect the bond purchases under the PEPP (Pandemic Emergency Purchase Programme) to be extended until the end of 2021. The central bank is also likely to increase the volume. Furthermore, we expect an increase in the factor (tiering factor) at which commercial banks can park money with the ECB without penalty interest. Although a further reduction in the deposit rate cannot be ruled out, we consider the positive effects for the economy to be very limited. Last but not least, we could imagine that the ECB would make existing and new TLTROs even more attractive.

New unconventional measures unlikely
Despite the announcement of further monetary policy measures in December, doubts are growing about whether the current ECB monetary policy can actually cushion the current concerns in the euro zone. Therefore, new opportunities are being feverishly sought. The Corona crisis is leading to considerable burdens, especially in the service sector, to which many companies are at the mercy of no fault of their own. Only if a wave of insolvencies can be prevented should the pandemic be brought under control should there be a rapid economic recovery. Against this background, discussions have arisen on the capital market as to whether the central bank can provide special support for small and medium-sized enterprises (SMEs). However, we consider special support for SMEs, for example through a new series of TLTROs, to be difficult to implement.

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