ECB: In aggregate, measures exceeded market expectations leading to easier financial conditions – Deutsche Bank

The European Central Bank increased the size of its emergency purchase program. According to analysts from Deutsche bank, the announcements from Thursday’s meeting in aggregate, exceeded market expectations and financial conditions eased as a result.

Key Quotes: 

“As demonstrated by the massively downwardly revised growth and inflation expectations, the COVID shock is deeper and more persistent than the ECB feared when it originally implemented the PEPP in March. The darker macro outlook increases the challenge to both the monetary policy stance and the smooth transmission of policy. The ECB responded to the challenge with significant changes to the PEPP.”

“The ECB increased the PEPP portfolio from EUR750bn to EUR1.35tr, extended the PEPP’s minimum net purchase period by six months to mid-2021 and announced the reinvestment of PEPP until end-2022, and thereafter a pace of roll-off of the PEPP portfolio consistent with the “appropriate monetary policy stance”. The latter implies that the monetary policy stance is superior to the rebalancing of PEPP back to the capital key benchmark and adds to the market’s positive view of the package. In aggregate, these measures exceeded market expectations and financial conditions eased as a result.”

“We view the press conference as more mixed. On the negative side, there is still no unifying framework to explain the different roles of the PEPP vs the PSPP - for example, why the instrument designed with multiple flexibilities is not the one deviating from capital keys. On the positive side, today’s package of measures underscores the ECB’s ability to act, in size and pre-emptively when necessary. The Recovery Fund will complement this nicely when it is approved. There was also, we believe, a constructive signal on how the ECB can contribute to solving the GCC conundrum.”