Strategy review, check, next? Five questions for the ECB


LONDON, July 19 (Reuters) – The European Central Bank’s July 22 meeting, which until recently was supposed to be a quiet rally ahead of the summer recess, is shaping up to be a key event following the publication of its strategic review so anticipated.

As part of the new strategy unveiled on July 8, the ECB will target 2% inflation and tolerate higher inflation when interest rates are close to the bottom, as they are now. Read more

“July looked like a meeting that could have been called off,” said Carsten Brzeski, chief economist at ING Germany.

“Now it got more exciting after the review, given the different interpretations of what this means and holds for future policy changes.”

Here are five key questions on the radar for the markets.

1. How will the ECB change its forward guidance?

The ECB is expected to change its policy stance to reflect the new 2% inflation target and possibly commit to a strong monetary policy response to achieve this target. Read more

Under current guidance, the ECB will buy debt for as long as needed and hold rates at current record levels until it sees inflation “converging sharply” towards its target.

Its updated forecasts must highlight the “leeway” it has given itself on inflation, otherwise it will lose credibility, Board member Mario Centeno told Reuters last week. Read more

“We believe the ECB will step up its forecast to signal a longer period of unchanged policy rates and net purchases under the Asset Purchase Program (APP) than the markets are currently anticipating,” Nick said. Kounis, Head of Financial Markets Research at ABN AMRO.

2. What is the future of PEPP?

Changing the forward guidance could be the easy part. Tackling what happens to the € 1.85 trillion ($ 2.2 trillion) PEPP emergency stimulus package, which expires next March, could be trickier and an issue the ECB is delaying until September . Read more

While an announcement extending the PEPP cannot be ruled out, there are two reasons why ECB chief Christine Lagarde might choose to postpone questions on the subject.

First, the ECB said emergency bond purchases will remain high in the third quarter and its next review will fall in September.

Second, the latest IMF staff forecast is released in September and the ECB may prefer to wait for updated inflation and growth estimates before acting.

3. Will the ECB boost its asset purchase program?

The ECB is facing pressure to show it is serious about its new 2% inflation target. This means it could increase the € 20 billion per month APP – introduced in 2014 to deal with a previous crisis and governed by stricter rules – once the PEPP is over, and add a little more flexibility.

“It is very likely that the APP will be recalibrated in terms of size and maybe even into something different,” said Frederik Ducrozet of Pictet Wealth Management.

4. Have the downside risks to the economy increased?

Rising coronavirus infection rates, driven by the infectious delta variant, are forcing more European countries to reimpose activity restrictions, which could hamper economic recovery. Read more

Almost 90% of economists polled by Reuters said the new variants of COVID-19 pose the greatest risk to the eurozone economy, which they expect to grow healthy at 4.5% this year. Read more

The ECB could address the outlook in a new simplified statement ahead of the press conference.

5. How serious are the divisions within the Board of Directors?

ECB policymakers debated reducing stimulus measures in June as the recovery gained momentum, but found “broad agreement” to keep support high, according to the published minutes of that meeting.

As divisions have become apparent in recent weeks, economic uncertainty over COVID-19 could offer policymakers an opportunity to put their differences aside.

“Even if you believe in the need to tighten the policy, it may be better to wait until September given the uncertainties,” said Ducrozet of Pictet.

Reporting by Dhara Ranasinghe; Graphics by Saikat Chatterjee; Editing by Sujata Rao and Catherine Evans

Our standards: Thomson Reuters Trust Principles.

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