ECB is set to hold fire and signal more easing in December amid lockdown fears

The Governing Council of the European Central Bank will meet this Thursday for a scheduled monetary policy meeting, and the backdrop couldn’t be bleaker. Lockdowns are being re-imposed across Europe as Covid-19 cases are surging and the economic outlook is deteriorating by the day, which will continue to weigh on inflation. The ECB however is not yet expected to add to its stimulus, but rather to signal action for December.

“We expect a clear signal for action in December coming from the meeting,” writes Dirk Schumacher of Natixis in a note from last week. “The risk to the recovery is rising again and latest inflation data have disappointed undershooting again staff projections. All this should clear the way for an increase of the PEPP in December.” The PEPP is the ECB’s pandemic emergency purchase program, first instituted in March.

Economic data is deteriorating once again, with the Flash PMI for the Eurozone hitting a four-month low. “The survey revealed a tale of two economies, with manufacturers enjoying the fastest growth since early-2018 as orders surged higher amid rising global demand, but intensifying COVID-19 restrictions took an increasing toll on the services sector, led by weakening demand in the hard-hit hospitality industry,” said Chris Williamson, chief business economist at IHS Markit.

Lockdown measures are getting reintroduced across Europe and the somewhat optimistic economic picture that ECB President Christine Lagarde previously painted at the last ECB policy meeting in September has darkened considerably. That is why most economists do expect action in December. ECB executive board member Philipp Lane, the mastermind behind the pandemic crisis measures, is said to be a friend of “package solutions”, which might be deployed again at the next meeting.

ECB is set to hold fire and signal more easing in December amid lockdown fears, CNBC, Oct 29