Is the ECB increasing its crisis program?

The Governing Council will meet on Thursday. The inflation rate has just turned negative. Does that open up new scope for ECB President Christine Lagarde?

Christine Lagarde during an ECB press conference in June

EFor the first time in four years, the inflation rate in the euro area has slipped into negative territory – and in particular the core inflation rate without energy and food, which is much noticed by central bankers, collapsed in August, from 1.2 to 0.4 percent.

Nevertheless, investors in the bond market have lately been predominantly convinced that the European Central Bank (ECB) will not top up its EUR 1.35 trillion crisis bond purchase program PEPP (“Pandemic Emergency Purchase Program”), at least at its meeting on Thursday.

“At the moment, the discussion in the markets is more about whether the current framework is being fully exploited or not,” said Christoph Rieger, bond market specialist at Commerzbank: “An increase is not expected in the near future, especially since the ECB’s net bond purchases were lower again in the last week of August. “

In the last week of August, the ECB bought bonds worth around 14 billion euros as part of the crisis program; In the meantime, however, it had been more than 34 billion euros in a week. Overall, the bond purchase program, which was increased by 600 billion euros in June, is measured at 1.35 trillion euros. It should run until at least June 2021.

David Zahn, head of European bonds at the fund company Franklin Templeton, was just as skeptical as Commerzbank: “We do not expect the ECB to expand its PEPP crisis program in the coming week,” said Zahn. Nonetheless, it is expected that the central bank will remain very “accommodative” in its monetary policy stance, ie it will turn to easing. The ECB will emphasize that it can further increase the program if necessary in the future: “We assume that the ECB will continue its bond purchases for many years until the economy recovers, and that interest rates for the next three to five Stay low for years. “

Crisis program “appropriate”

If the central bank does not want to increase the program yet, but the low inflation in the euro zone and concerns about the corona crisis in Spain, for example, are still preoccupying it, it could, for example, react with further steps to relieve the banks, said Ralf Umlauf, Economist and bond market specialist at Landesbank Hessen-Thüringen (Helaba). Despite all the aid programs, it is to be expected that there will be loan defaults soon. For example, an expansion of the tax exemptions for banks in the case of negative interest rates (“tiering”) or new steps in the low-cost long-term loans for banks TLTRO are conceivable.

ECB Executive Board member Isabel Schnabel recently said in an interview that she currently considers the volume of the PEPP pandemic purchase program to be “appropriate” and that the ECB has reduced the weekly purchase volume somewhat due to the more relaxed situation on the financial markets.

“Ms. Schnabel is absolutely right, there is currently no need to increase the program,” said Holger Schmieding, chief economist at the Hamburg bank Berenberg. However, the new inflation figures showed that the price pressure in Europe is extremely subdued: “If the price pressure remains similarly subdued in the coming months, many in the Central Bank Council in December should insist on extending the PEPP crisis program until the end of 2021 and reducing the overall scope of the To increase the program accordingly. “

An increase in PEPP is not likely in the near future, said Stefan Bielmeier, chief economist at DZ Bank: “If the economic situation in the countries, mainly Italy and Spain, does not develop as expected, the PEPP bond purchase program should be increased probably. ”Frederik Ducrozet, economist at the Swiss bank Pictet, thinks it is possible that the central bank will expand its crisis program in December, for example by 500 billion to 1.85 trillion euros.

Is Lagarde reacting to the expensive euro?

Last week there was also a debate about whether the ECB would react to the strong exchange rate of the euro against the dollar. It makes exports by European companies to the dollar zone more expensive and could thus hinder the recovery after the corona shutdown, even if it makes many imported products cheaper for consumers in Germany.

On Tuesday, when the exchange rate of the euro against the dollar briefly exceeded 1.20 euros, ECB chief economist Philip Lane had already discussed the revaluation of the European common currency. Lane had said that even if the ECB does not have an exchange rate target, the exchange rate is “important” and “relevant to monetary policy”. In the financial markets, this was partly interpreted in such a way that the ECB could act here. As a result, the exchange rate of the euro fell slightly. On Thursday, the British newspaper “Financial Times” published a report according to which several, unnamed representatives from the top of the ECB expressed concern about the consequences of the euro appreciation.

ECB President Christine Lagarde will probably have to take up the issue on Thursday, writes Bankhaus Metzler: “Although Lagarde will once again find on Thursday that the ECB is not aiming for exchange rate targets, it should make it sufficiently clear that a higher external value of the euro will have an impact on the inflation and growth picture. “