- The ECB meeting concluded today was not a ‘significant’ meeting, with no new signals leaving many decisions for the June meeting. Near term growth outlook was ‘titled to the downside’ while the medium term growth risk was ‘broadly balanced’. The latter has paved the way for a lower PEPP volume to be agreed at the June meeting.
- Regarding the PEPP implementation, there are still a number of outstanding questions. While Lagarde emphasised we should not focus on the weekly figure, but rather on the monthly figures, it remains unclear if the increase we have seen (when corrected for trading days) is the full amount of ‘significantly’. We expect so and do not expect higher volume.
- Rates traded in a tight range through the press conference. Initially a minor sell-off on the back of the 16 March comment of significantly higher volume which was reversed as Lagarde said that ECB and Fed are ‘not on the same page’.
- On the EUR/USD, this notion of the regional differences between the Fed and the ECB sent EUR/USD lower. Despite general global optimism, in an FX perspective it is not necessary to see ECB as a laggard to Fed. EUR/USD fell 30pips from today’s highs to around 1.2030.
Economic, inflation outlook and financing conditions
The economic and inflation outlook were broadly as expected. The economic activity should record a ‘firm rebound’ in the course of 2021 on the back of the vaccination campaign. At the same time, fiscal policy measures supported firms and households. ECB saw signs of bottoming out in services albeit ‘restrictions on mobility and social interaction still limit activity in the services sector’. On the inflation side, we did not see any news. Inflation continues to be driven by transitory and base effects this year while underlying inflation is still subdued. ECB did take note of the rise in market based inflation expectations. Financing conditions ‘remained broadly stable recently… but risks to wider financing conditions remain’. Lagarde did also highlight the expected tightening of credit standards by banks as shown in the recent bank lending survey.
PEPP – looking for June
As we discussed in our ECB Preview-An appetizer for the June meeting, 15 April, today’s meeting was mainly an appetizer for the discussions in June. We see the current monetary policy stance as paving the way for ECB to reverse its bond buying to around EUR60bn/month during the summer period. There was no communication about what ‘significantly’ higher volumes means exactly. Lagarde said that tapering PEPP discussions was premature.
This means that at the June meeting the PEPP purchases will be set according to ECB new staff (inflation) projections and the financing conditions. As data has come in in line with expectations since the March meeting we expect the PEPP volume to revert to around EUR60bn/month.