ECB Research: Recalibrating - not reinventing - the toolbox
|In March this year, we published a piece ECB Research - Action needed urgently, 18 March, where we discussed the various options the ECB could take after the rapid sell-off in early/mid-March at the start of the COVID-19 spread and lockdowns in Europe. With the ECB's pre-commitment at the October meeting to recalibrate its monetary policy stance at the upcoming 10 December meeting, we update the piece and discuss the various options the ECB could deploy.
Lagarde's speech at the ECB Forum on Wednesday gave a clear indication of the focus of the ECB's recalibration of monetary policy instruments. We remain of the view that given the political challenges and the ECB's ability to support the economy via ensuring easy financial conditions on favourable liquidity conditions and low rates, the ECB's toolbox is not the best fit, but should be seen as a conditional and not sufficient package to address the current lockdown and support the economic recovery. Other policy areas hold the key here. The key to note from Lagarde's ECB forum speech is that the ECB will not focus on increased stimuli, but rather ensure a longer accommodative monetary policy stance.
At the 10 December meeting, we expect the ECB to stick to its recent thinking of a targeted and not a general easing of its monetary policy stance, where notably the PEPP and TLTRO are key.
PEPP: Add another EUR400bn to the current PEPP envelope running until end-2021. The ECB may also increase the APP purchase rate, but as this is less powerful than the PEPP, it is not as important unless the monthly purchase rate is increased significantly to e.g. more than EUR40bn/month. The ECB will not commit to a specific monthly target under the PEPP.
TLTRO/PELTROs: Extend the discount window to the entire duration of the liquidity operation (3y). Provide four additional TLTRO liquidity operations until Q1 2022 (quarterly basis). PELTROs to continue into end-2021 on a monthly basis.
Tiering: Increase the tiering multiplier to 10x the reserve requirement.
Collateral: Extending the 7 April grandfathering of the collateral eligibility rules until end-2022.
No rate cut.
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