ECB at the July meeting maintained all the monetary policy measures unchanged. President Christine Lagarde acknowledged the encouraging economic recovery in May and June. She also suggested that the rebound will continue into 3Q20, as supported by monetary and fiscal stimulus. Yet, Lagarde also warned of the high uncertainty ahead. On the monetary policy, ECB affirmed the intention to use the PEPP envelope in full as inflation has remained subdued.
The members acknowledged that incoming date since the last meeting signaled “a resumption” economic activity. They also noted that “both high-frequency and survey indicators bottomed out in April and showed a significant, though uneven and partial, recovery in May and June” Yet, they remained vigilant, suggesting that the level of activity “remains well below the levels prevailing before the coronavirus pandemic” and “the outlook remains highly uncertain”. Moreover, headline inflation, depressing by lower energy prices, should “remain very subdued”.
Against this backdrop, ECB pledged to maintain the deposit rate at -0.5%. The main refi rate and the marginal lending rate also stay unchanged at 0% and 0.25% respectively. The market was concerned about the use of PEPP, especially after several members’ comments that it might not be used in full. At the meeting, ECB pledged to continue the program with a total envelope of 1.35 trillion euro. The central bank noted that the program contributes to “easing the overall monetary policy stance, thereby helping to offset the pandemic-related downward shift in the projected path of inflation”. It noted that the purchases “will” continue “until at least the end of June 2021 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over”. After then, the proceeds will be reinvested until at least the end of 2022. At the press conference, Lagarde stressed that unless there are significant positive surprises, the bank’s base line case is that the emergency purchase “envelope” would be used in full. We believe this has opened the door for further stimulus and would exert downward pressure on yields.
