ECB preview: The only game in town

• At first glance, the ECB meeting next week is not expected to bring new policy measures after the host of measures taken by the ECB over the past six weeks, notably the PEPP programme of EUR750bn, collateral easing and abundant liquidity.

• However, new policy responses cannot be ruled out as the ECB seems to be the only game in town in the near term and will signal a readiness to act.

• We expect core/semi-core rates to remain range bound post ECB meeting. We recommend receiving Dec 20 3m Euribor.

Length and depth unknown...

While the worst in terms of COVID-19 infections is probably behind us for now, evidence of the severity of the economic fallout is just starting to emerge. Flash PMI readings for April pointed to the steepest fall in business activity for the euro area ever recorded. While the service sector bore the initial brunt of the corona crisis, the collapse in demand and supply constraints have now also caught up with manufacturers. Employment losses also gathered speed, although anecdotal evidence suggests short-term work schemes in Europe are helping to limit job losses.

We expect the ECB to acknowledge the severity of the current recession as the worst since the 1930s, but stress that uncertainty about its length remains significant. Uncertainty also reigns with respect to the inflationary impact. With the corona crisis constituting both a demand and a supply shock, its effect on medium-term inflation is not clear cut (see Euro Area Research - Euro inflation in the corona maelstrom, 1 April 2020). Added to this the data quality of the coming HICP prints will be lower than usual, with a significant part of the (services) sub-indices featuring imputed prices as price collection is severely hampered due to lockdown measures. Because of these issues of data reliability and country heterogeneity in imputation methods, central bankers and markets will probably also put less weight on the coming inflation prints.

... so no need for new easing...

As a result of the unknown length and depth of the crisis and with ECB having already launched its PEPP, buying EUR750bn until year end, an additional APP envelope of EUR120bn this year as well as its EUR20bn/month, we do not expect an increase in the purchase programmes (or rate changes) at this stage. The ECB has so far only used around 10% (EUR70bn) as of last Friday of the EUR750bn and likely around EUR30bn of the additional APP envelope.

Therefore, we expect the ECB to reiterate its commitment to stand ready to increase and extend the purchase programme and stand ready to act should more be needed.

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