ECB Forum : A clear roadmap for the December meeting

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  While the era of monetary dominance is likely come to an end, central banks all around the world are still coming up with new creative ways to try to improve monetary policy transmission and mitigate the side-effects of the current second pandemic wave. Recently, the Bank of Japan announced a special deposit facility to trigger a M&A wave in the banking sector while the RBNZ unveiled a new Funding for Lending programme to reduce banks' funding costs and reduce interest rates. Yesterday it was the turn of the ECB to send a strong and committing signal to the market in favor of new measures to cope with the virus and its economic consequences. Central bank innovation continues to avoid a lost decade.


Yesterday, at the Sintra virtual ECB Forum, Christine Lagarde delivered a powerful and committing introductory speech (see here the full transcript):

“The ECB was there for the first wave and we will be there for the second wave. We are, and we continue to be, totally committed to supporting the people of Europe” (November 11th).

The forum continues for a second day, with a special focus on falling natural rates, fiscal policy and financial instability. Lagarde, Powell and Bailey will participate as speakers to the panels this afternoon. You can follow the live session here.

Lagarde’s comments echoes the opinion of Vice Fed Chair Clarida :

“I can assure you that we are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible” (October 14th here the full transcript).

In further details, Lagarde provided important insights to market participants ahead of the December meeting. Here are the main takeaways:

  • Lagarde explicitly dismissed rumors that the ECB is looking to pressure euro area member countries to take loans from the European recovery plan.
  • The PEPP (Pandemic Emergency Purchase Programme) and TLTRO (Targeted Longer-Term Refinancing Operations) are likely to remain the main tools for adjusting the ECB’s monetary policy, thus indicating that a further rate cut is not on the table at the moment.
  • The ECB is expected to further support the banks, which means more favorable TLTRO.
  • Lagarde insisted mostly on duration of QE, rather than on the level of support necessary to keep financial conditions accommodative, which points out to an extension of the current main asset purchases programme in the near term. It also means that the ECB is not inclined to buy the remain amount on the envelope of €1850bn by December this year.

 

In conclusion, we expect the following measures from the ECB next month:

 

  • The PEPP programme will be extended until at least the end of 2021 but without any intensification of the purchases.
  • We also expect better TLTRO III terms or a new TLTRO IV with longer maturity and lower rate, i.e. a 3-year period at minus 1%.
  • An adjustment of the Asset Purchase Programme, which has been mentioned by other strategists, does not seem to be a credible option in the short term. If needed, the ECB can always boost the APP in 2021 depending on the path and the speed of the recovery in the euro area.

 

There are still some work to be done by the Committees but we have already a very clear and strong signal from Sintra indicating that all the options are on the table and that further support will be provided at the December meeting. Combined with positive vaccine news that are likely to pop up in the coming weeks (we are waiting for Moderna’s update on its vaccine), the continued central bank support will keep fueling expectations and positive mood in the market at least until year-end. Investors have already priced in bad economic data related to the re-imposition of lockdowns and we don’t see much risks ahead, with the exception of the risk of shutdown in December in the United States that might have a limited market impact if it materializes. No need to say that Brexit is not on your list, we still believe that in the next two weeks a bare bones free trade agreement will be reached between the United Kingdom and the European Union. Therefore, the market rotation into cyclical, value stocks and especially emerging market assets that has occurred since early November, with strong performance from Asian indexes and currencies, is only starting and more gains are coming.

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