Is it necessary again now or not until December? At present, not a day goes by without at least one member of the European Central Bank (ECB) suggesting further monetary easing. Always with the addition: “if necessary”. Is this already the case?
Since March, the ECB’s bond purchases have significantly stabilized the capital markets, which can be seen, among other things, in the “financial conditions”. These are almost as loose again as they were immediately before the crisis. In addition, a fragmentation of the interest rate environment was prevented within the euro zone. For example, the yield premium on Italian government bonds over Bunds has narrowed significantly. A key objective of the Pandemic Emergency Purchase Program (PEPP) was thus achieved. However, the second goal of bringing inflation back on the path it had set before the corona outbreak has not yet been achieved.
Even before the crisis, the central bank saw itself permanently missing the inflation target and tried to get over it by resuming bond purchases. However, the corona crisis has not only pushed the path of inflation down, it may also shift the prospects of a rapid increase backwards. In addition, the economic recovery is accompanied by a high level of uncertainty, which is exacerbated by the renewed increase in the number of infections and the reintroduction of regional lockdowns. This could significantly reduce the momentum for the economic recovery.
In this environment, the ECB is likely to remain true to itself and continue to accelerate monetary policy. It will also stress that it will do whatever it thinks is necessary to support the economy and the capital markets. We believe that this will not happen this month, but will happen in December, when the new projections for growth and inflation through 2023 will be available. The means of choice should remain the PEPP, an emergency instrument with flexible uses. We therefore do not expect an interest rate cut, it would also be counterproductive. In this respect, the monetary policy meeting on October 29 should provide the preparation for monetary policy action in December. Then the PEPP should be topped up and extended until the end of 2021.
Author: Ulrike Kastens, European economist
Disclaimer: The text is a column of the DWS. 4investors is not responsible for the content of the column and therefore does not necessarily have to agree with the opinion of the 4investors editorial team. Any liability and claims are therefore expressly excluded by 4investors!