Expert notice: ECB will run out of ammunition this summer

23/05/2020

Expert notice: ECB will run out of ammunition this summer

Analysts expect the ECB to expand the emergency bond purchase program at its June meeting.

In mid-March, the European Central Bank (ECB) decided to put all the meat on the spit with the announcement of an emergency bond purchase program (PEPP) worth € 850 billion. After just two months, experts begin to warn that the institution led by Christine Lagarde will have exhausted all her ammunition this summer, so she will be forced to increase the program if governments do not take over with a powerful fiscal response.

“The ECB’s PEPP looked huge when it was announced. Now we are concerned that the pace of purchases may cause the 750 billion euro item to be exhausted at the end of the summer, ”explains Gilles Moëc, chief economist at AXA Investment Managers. “There is a dangerous spiral that the ECB has to deal with,” Moëc explains. “Doubts about the ECB’s ability to break its own self-imposed limits, exacerbated after the recent ruling by the German Constitutional, encourage the sale of bonds. of some of the most fragile countries, which ends up forcing the monetary authority to accelerate its daily purchases. At the current rate, the ECB will have exhausted the entire PEPP plan by the end of the summer, much earlier than expected. ”

The AXA expert highlights the “very significant acceleration of purchases, going from May 4.4 to 8,500 million euros on the week of May 8”.

“We think it would be preferable if the ECB announced an extension of the program at its meeting on June 4. On the one hand, it could be seen as a provocation, after the failure of the German Constitutional Court and without giving a response. But at the same time, the market could interpret the lack of announcements as an indication of poor resolution by the ECB, which again could accelerate bond sales in the most fragile countries. ”

In this sense, “if eventual communication errors in this June meeting forced the monetary authority to further increase its purchases, for example, raising them to a level of 13,000 million euros per day, then the ECB would have exhausted all the PEPP to when the next scheduled meeting of the entity arrives, on July 16. It is always better to see the ECB as a proactive institution, rather than making decisions driven by market circumstances. This is why we consider that the preferable course of action would be to announce an extension of the PEPP in June ”, concludes Moëc.

The AXA economist is not the only one who believes that the ECB will end up expanding its bond purchase program. ABN Amro analysts expect an increase of up to 750,000 million euros, to bring the PEPP to 1.5 billion.

Analysts at the Dutch bank expect inflation to slide in the coming quarters to end next year at levels not far from zero. In this context, “the risks of a sustained period of modest deflation are now significant.” Furthermore, they estimate the public financing needs of the member states of 1.05 trillion. “We believe that the ECB will have to absorb a large part of this additional offer to avoid a tightening of financial conditions,” they conclude.

NETHERLANDS WEATHER