Yesterday the ECB announced further support measures recalibrating its monetary policy instruments in light of a resurgence of the pandemic and its economic fallout: euro area economic activity is expected to contract in Q4 and there is a more protracted weakness in inflation than had been envisaged. In the press conference opening remarks ECB President Christine Lagarde noted: “The monetary policy measures taken today will contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability.
In terms of the measures announced, as expected, the ECB left its key interest rates unchanged and increased the pandemic emergency purchase programme (PEPP) by EUR500bn to EUR1.85tn and extended the programme “to at least the end of March 2022” noting “wewillconduct net purchases until the Governing Council judges that the coronavirus crisis phase is over.”Principal payments from securities that mature under the PEPP will also be reinvested to “at least the end of 2023”. The ECB also recalibrated the conditions of the thirds series of the targeted longer term refinancing operations (TLTRO-III) by extended the favourable terms offered out to June 2022, planning to conduct 3 additional operations between June and December 2021 and raising the amount counterparties are eligible to borrow to 55% of their eligible loans from 50%. The borrowing conditions are available to banks that meet a lending performance target. Other measures include the extension of the easier collateral conditions for banks out to June 2022, the ECB will offer four additional PELTROs (pandemic emergency longer term refinancing operations) in 2021 as a liquidity backstop, and it will continue the net asset purchases at a rate of EUR20bn per month for as long as is necessary.
When asked at the press conference about the duration of the extension to the programmes Lagarde responded: “We have good reasons to believe that by the end of 2021, with all the uncertainty associated with it, let’s face it, that we will have reached sufficient herd immunity.” The strength of the euro was also a focus, particularly with the revised inflation forecasts of 0.2% in 2020, 1% in 2021, 1.1% in 2022 and 1.4% in 2023. Lagarde commented: “We do not target exchange rates. But clearly the exchange rate, and in particular the appreciation of the euro, plays an important role and exercises downward pressure on prices, so we monitor it. We will continue to monitor it very carefully going forward.”
Elsewhere an interesting outlook from the team at Morgan Stanley should there be no deal in the ongoing Brexit saga. They look for a 6% to 10% fall in the FTSE250 led by a 10% to 20% in UK banks, they also look for negative short rates and a subsequent move down in Sterling to around 0.95 Euros. The BOE meets next week, 17th, and further stimulus is also expected should no deal be agreed. We shall see.