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. 

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis

Latest Forex Analysis

Editors’ Picks

GBP/USD tumbles from the highest since 2018 on the Brexit impasse

The GBP/USD roller coaster continues with a downfall below 1.35 after the pair hit a 31-month high of 1.3539 earlier. Brexit talks have yet to yield an agreement. Negotiations are set to continue through the weekend.


EUR/USD battles 1.2150 after disappointing NFP

EUR/USD is trading off the 32-month highs amid bumps in US stimulus and vaccine distribution. Markets await the all-important US Nonfarm Payrolls missed expectations with 245K jobs gained in November. 


XAU/USD fails to break $1850 and turns to the downside

Gold peaked after the beginning of the American session at $1848/oz reaching the highest level since November 23 and then turned to the downside. It bottomed at $1829 and is it about to end the week hovering around $1830.

Gold news

Dollar downfall explained and what's next for markets

The safe-haven US dollar is hitting multi-month and multi-year lows against its peers while stocks are on fire. What is behind the risk-on rally? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss markets' moving parts as 2020 nears its end.

Read more

Extra week of Black Friday!

Learn to trade with the best! Don't miss the most experienced traders and speakers in FXStreet Premium webinars. Also if you are a Premium member you can get real-time FXS Signals and receive daily market analysis with the best forex insights!

More info

Forex Majors