Daily Outlook

ECB set to scale up stimulus as new data could indicate a need to do more

The European Central Bank (ECB) is expected to increase its coronavirus crisis asset-purchase program at this week’s meeting, amid fears of falling inflation and the steepest economic contraction since World War II for the euro zone.

In March, the ECB unveiled its Pandemic Emergency Purchase Programme (PEPP), which will see it buy 750 billion euros ($819 billion) in euro zone government bonds this year. Analysts are now expecting it to increase that number.

“We see a 60% probability that the ECB will raise its asset purchase target on Thursday, probably by 500 billion euros,” Florian Hense, from Berenberg Economics, wrote in an analyst note. “Gloomy staff projections for growth and inflation will make it easy to justify such as decision.”

Staff projections for inflation and economic growth are also likely to be downgraded this week, at least in the short — and perhaps the medium — term.

″(ECB President) Christine Lagarde’s comments suggest that the ECB will adopt a baseline forecast for euro area growth somewhere between its medium and severe scenarios — in other words, around -9% in 2020, 5% in 2021 and 3% in 2022, with headline inflation at 0.3%, 1.0%, 1.5%, respectively,” Frederik Ducrozet and Nadia Gharbi, from Pictet Wealth Management, wrote in a note.

Lagarde has stressed multiple times that the central bank cannot be the “only game in town” and might welcome the ambitious European Commission proposal for an EU recovery fund and the fiscal measures taken or discussed across the euro area.

But despite this fiscal response, the ECB is unlikely to stay inactive, as it faces the risk of low inflation turning into deflation and the fragmentation of the euro area.

ECB set to scale up stimulus as new data could indicate a need to do more, CNBC, Jun 3

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