• Near term economic risks still to the downside but seem more balanced over the medium term 
  • Scaling back PEPP purchases? would be “premature”
  • Fall of 2021 is the deadline to deliver on the Strategy Review

The ECB’s policy meeting today lived up to its intermediate status, reaffirming the governing council’s assessment for the Euro Area macro economic outlook put forth in the previous policy meeting in March. As such, the ECB left all its monetary policy settings as well as forward guidance unchanged, with President Lagarde striking a note of cautious optimism over the medium term outlook while being cognizant of near term downside risks and underlying uncertainty.

Reassuringly, the ECB expects economic recovery to gain traction over the course of 2021, despite the possible contraction in the first quarter. In this respect, Ms Lagarde sounded slightly more optimistic when talking about recent indicators, than over the past meeting. The risks, however, are still tilted to the downside in the near term even as medium term risks are seen as much more balanced, which is in line with the broad-based view that the Eurozone economy is set to accelerate over the second half of the year.

On the pandemic emergency purchase programme (PEPP), the ECB reiterated that it will maintain asset purchases at a significantly higher pace during this quarter than during the first two months of the year. Mrs Lagarde highlighted that the intensity of the purchases doesn’t depend on a specific date, but rather is based on the state of prevailing financing conditions as well as the inflation outlook. Hence, the ECB will determine the pace of purchases on the basis of these two elements, which, in Lagarde’s words, are “quite complicated in their own respect, each of them”. Mrs Lagarde pushed back against any suggestion on whether the ECB is thinking about scaling back stimulus, describing the idea as “premature”. She made a clear distinction between the Fed (and other central banks such as the Bank of Canada that has announced tapering), stating that “we are not on the same page as the US”. As such, any determination concerning the pace of purchases of PEPP would be entirely data depending.

The effectiveness of TLTRO III operations was emphasized, particularly the high take-up of funds at the latest operation, in which institutions asked for €330.5 billion (figure that exceeded market expectations). She also highlighted that they are playing a critically important role in facilitating banks’ lending operations.

Meanwhile, the ECB disclosed that it is well into the 2nd half of the review of its monetary policy strategy (Strategy Review) and is looking at multiple proposals, views and recommendations. The central bank is committed to deliver on its deadline for release before the fall of 2021, although Mrs Lagarde tempered expectations of an earlier than expected release, noting that there is still some work that has to be done.

All in all, today’s monetary policy meeting reconfirms ECB’s March assessment. It provides more credence to the view that medium term risks have become more balanced, which could pave the way for a normalization of PEPP purchases path back to 1Q21 levels of around €60 billion after this year’s June meeting. In a snapshot, the ECB awaits better clarity on the evolution of the pandemic and thereby, on the shape of the economic recovery and financial market conditions, while continuing to use the PEPP with high flexibility so as to preserve favourable financing conditions.

This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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