ECB to step up its PEPP by another 250bn and extend the APP at the June meeting

The European Central Bank (ECB) held on Thursday its policy meeting. Analysts at Danske Bank point out the central bank decided not to change the modalities of either the PEPP or the APP in size, composition or similar, however, made a pseudo rate cut for banks in the period between June this year and June next year by lowering the TLTRO rate by 25bp in the period. They expect the ECB to step up its PEPP by another EUR 250bn and extend the APP at the June meeting.

Key Quotes:

“We expect the ECB to continue its APP beyond the end of 2020, at a monthly purchase of EUR20bn at least until September 2021. At the same time, we expect it to announce an increase and extension of the PEPP for another EUR250bn until Q1 20 next year. We expect the announcement to come at the June meeting but we also highlight that the ECB could wait for the September meeting.”

“With the sweetened TLTRO terms, which now offer liquidity at the deposit rate -50bp (25bp reduction compared with March decision) and increased collateral rules/sweetened terms, the ECB has raised the incentive for euro area banks to increase the risk appetite and support any financial fragmentation. This also means that if euro area banks’ risk departments allow banks to take more risk, banks have an incentive to buy, for example, BTPs rather than the ECB. In our view, this reduces the risk of a PEPP increase. However, we expect the ECB ultimately to lift the envelope.”

“We believe today’s ECB measures to boost credit growth are an important step to support the economic ‘restart’ once lockdown measures are lifted. We – and the ECB – still look for a rebound of the economy in H2 20 but we believe it will take some time before pre-crisis GDP levels are reached, especially in Italy, where GDP has fallen to the lowest since 2000 in level terms.”

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