ECB preview: An appetizer for the June meeting

The ECB meeting on Thursday next week will be a stock taking meeting with focus on the resilient economic data and positive outlook for coming months while Lagarde will face questions on the recent PEPP purchase behaviour. The PEPP data has only shown an uptick in gross purchase pace last week if corrected for number of trading days, well past the March meeting announcement.

We expect the growth outlook to be ‘broadly balanced’ paving the way for the PEPP purchase pace going back to February levels around EUR60bn after the June meeting. We think Lagarde will repeat the ‘delayed and not derailed’ recovery narrative.

While we expect the June meeting will conclude in a lower PEPP buying, the battle about PEPP’s future is set for September in our view. We read the ECB as a central bank that are slowly paving the way to exit the crisis response tools. Therefore, we expect ECB to end PEPP net purchases no later than March 2022, leaving reinvestments, net APP purchases and another round of TLTROs as the policy mix beyond March 2022. 

We expect markets to trade mostly sideways through the press conference.

ECB more likely to end PEPP than extend

The recent rather muddled communication from GC members on the back of the March decisions, notably about how to view and assess the financing conditions, have led us to conclude that there are an internal split in the governing council about the future of the PEPP. The March minutes clearly showed in our view that the doves ‘won’ on paper while the hawks ‘won’ on substance. The minutes show that the 'broad agreement' for increasing the PEPP buying by a ‘significant’ amount ‘over the next quarter’ was conditioned that 'the total PEPP envelope was not being called into question in the current conditions and that the pace of purchases could be reduced in the future.' Furthermore, the ECB GC has a revealed preference for reviewing the overall stance of financing conditions on the inflationary outlook at the quarterly meetings, which also means that ECB is not here to micro-manage spreads or market levels.

Furthermore, we see the ECB as being a central bank that is not concerned about the level of interest rates. The minutes noted that the ’risk-free rates and GDP-weighted sovereign bond yields had increased…’ yet the GC '… needed to avoid giving the impression of being overly focused on sovereign yields or reacting mechanically to a set of indicators of financing conditions', while at the same time the minutes also say that rises in GDP weighted yield 'needed to be pronounced and persistent in order to exert a material impact on broader financing conditions.' This has led us to conclude that ECB is more likely to end PEPP net purchases than extend the package beyond March 2022. Finally, as ECB did not intervene during the market sell-off in late February using the flexibility within the PEPP programme, we find the bar for using additional bond buying pace beyond the current decision substantial. Ultimately, we judge that the ‘flexibility is very differently perceived by market participants than the ECB.

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