ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide
A cyclist wearing a protective face mask passes the European Central Bank headquarters in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

European Central Bank officials will meet Thursday aware that while they’ve probably done enough to fight the coronavirus crisis for now, they face an uneasy summer.

The Governing Council is widely expected to keep its emergency bond-buying program unchanged at 1.35 trillion euros ($1.5 trillion), supplemented by negative interest rates and generous long-term loans to banks. Yet President Christine Lagarde will face questions on whether current monetary and fiscal pledges will prove sufficient to return the economy to health.

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

The outlook continues to be dire despite recent signs of recovery, and economists are already predicting purchases will be boosted by another 500 billion euros later this year. One particular challenge for policy makers this week is that they will make their assessment not knowing whether the European Union’s recovery fund will be approved or watered down. Leaders start talks on Friday, with some opposing the plan in its current form.

Follow the ECB decision and press conference on our live blog

Emergency Stimulus

Flexible, large-scale asset purchases have been the ECB’s flagship crisis tool. Economists surveyed by Bloomberg predict bond-buying under all programs will exceed 2 trillion euros this year and next.

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

One area of controversy is how far the ECB should go in favoring debt from weaker economies. The institution has skewed purchases toward Italy, but will eventually need to rebalance its portfolio to make it reflect the relative size of each member state.

While most officials have -- at least in theory -- committed to that rule, some including French governor Francois Villeroy de Galhau have labeled it an “uncalled-for constraint.” Austria’s Robert Holzmann said Tuesday he’s keen to discuss buying limits at the meeting, after German media reports warned of the consequences of too much flexibility.

Getting Fiscal

Lagarde is likely to renew her call on governments to agree on joint fiscal stimulus. German Chancellor Angela Merkel has signaled willingness to compromise about how much of the 750 billion-euro pot should be loans and grants, but Dutch Prime Minister Mark Rutte, one of the main opponents, said he’s “somber” about reaching an agreement.

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

Region-wide support is key as many of the emergency programs rolled out by governments are set to expire in the coming months. The European Commission has cautioned that risks remain “exceptionally high and mainly to the downside,” and aligned its projection for this year’s economic slump with the ECB’s that foresees output falling nearly 9%.

What Bloomberg’s Economists Say...

“Data describing the scale of the shock and subsequent rebound remain sparse, but the signals have been generally positive. We expect the ECB to strike a note of cautious optimism and declare the near-term recovery as broadly in line with their expectations.”

-- Maeva Cousin, David Powell and Jamie Rush. Read the ECB PREVIEW

Tiering Question

With banks nervous about the outlook and pondering much-tighter lending standards, policy makers may discuss exempting more overnight deposits from negative interest rates. Pictet & Cie’s Frederik Ducrozet argues that one trigger for such a step could be a surge in Italian banks’ deposits at the ECB in June.

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

Yet the central bank already is extremely generous. Incentives built into its long-term lending program mean it could end up paying participating institutions as much as 1.6 billion euros this year, according to Danske Bank’s Piet Christiansen. He said policy makers currently have no reason to worry about bank profitability, and argued that sparing yet more deposits would risk driving up market rates -- something the ECB will want to avoid.

ECB to Keep Stimulus Steady as Crisis Persists: Decision Guide

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