New Europe Lockdowns Raise Prospect of ECB Stimulus Surprise
(Bloomberg) -- New coronavirus lockdowns by the euro zone’s biggest economies are boosting the chance of preemptive monetary stimulus by the European Central Bank this week.
Germany and France are following Italy and Spain with restrictions echoing those that triggered an unprecedented slump earlier this year. While most economists and investors still think the ECB will wait until December to expand its bond-buying program, the dramatic shift in risks has put them increasingly on guard for surprise action on Thursday.
”We are starting to hear stronger arguments by market participants for the ECB to lay a firm pre-commitment already tomorrow due to the ‘why wait if you know it will come’ argument,” said Piet Christiansen, chief strategist at Danske Bank. “I have some sympathy with that.”
Christiansen and most of his peers still expect the ECB to wait, but they want to see a signal from President Christine Lagarde in her press conference on Thursday that more stimulus is coming. One option is to use language strong enough to prevent an adverse market reaction, such as a jump in bond yields in some countries.
Most economists foresee a 500 billion-euro ($587 billion) increase in the 1.35 trillion pandemic bond-buying program in December. Policy makers will have updated economic projections then to support an increase, and may have greater clarity over geopolitical risks such as Brexit and the U.S. election.
”I don’t think the ECB will surprise on Thursday,” said UniCredit’s Marco Valli. “The pandemic purchasing envelope is not even half used, so there’s no rush. Certainly there will be a clear message that they will do more in December.”
On Wednesday, German Chancellor Angela Merkel reached a deal for a one-month partial lockdown after talks with leaders of the country’s 16 states.
Policy makers were already worried about the outlook. Even before the new restrictions, euro-area services were shrinking, because of the hit to hospitality, and measures of sentiment had slipped. That’s put pressure on the ECB to join governments in ramping up support.
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“The ECB still has time on its side. The Governing Council’s reaction function is well understood -- governments and markets know that a more costly pandemic will be met with fresh asset purchases. And there’s space within existing programs to keep spreads in check if financial conditions deteriorate.”
-Jamie Rush. Read Bloomberg Economics’ GERMANY INSIGHT.
The monetary-fiscal double act has been key to protecting businesses and millions of jobs during the pandemic. With the new closures, governments will have to pump more money into aid programs again. Italy approved a new relief package on Tuesday to help sectors, and Germany also plans enhanced assistance.
“I’ve never fully bought the argument that the ECB should wait for the staff projections,” said Frederik Ducrozet, global strategist at Banque Pictet & Cie. “We know for a fact that inflation is already too low and unlikely to reach the target by 2022, what else do they need before they act?”
Policy makers including Lagarde have warned that a surge in coronavirus infections will come with a high cost to the economy, and the deteriorating outlook means a double-dip recession is now more likely.
The ECB is in its traditional quiet period before the meeting, giving few clues to the latest thinking of officials. Spain’s Pablo Hernandez de Cos offered a lone view on Monday though, when he said “it can’t be ruled out that the impact of the pandemic on the economy and the persistence of the effects are greater than expected.”
Investors are betting that whether this week or not, more bond-buying is coming. German bonds rallied Wednesday to send benchmark 10-year yields to the lowest since March’s market turmoil. Italian and Greek yields have fallen to record lows this month, though they have since picked up to widen their spread over Germany -- a key gauge of market risk.
“The case for more easing is clearly there,” said Joubeen Hurren, a money manager at Aviva Global Investors. “But it’s unlikely they deliver new policy tomorrow. More likely is that we see a dovish hold with the Governing Council signaling willingness to do more if needed.”
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