Europe | Monetary Policy & Inflation
Today’s increase in the size of the ECB’s pandemic emergency purchase programme (PEPP) adds another layer to Europe’s response to the COVID crisis. This comes on top of additional and significant fiscal stimulus in Germany and the earlier proposal for coordinated support via an EU Recovery Fund.
An above consensus EUR600bn increase in PEPP brings the total package to EUR1350bn with the programme now set to run until June 2021. Expectations on the extension of the PEPP timeframe were more varied and the stated rationale for June was to allow for greater visibility on the inflation outlook.
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Today’s increase in the size of the ECB’s pandemic emergency purchase programme (PEPP) adds another layer to Europe’s response to the COVID crisis. This comes on top of additional and significant fiscal stimulus in Germany and the earlier proposal for coordinated support via an EU Recovery Fund.
An above consensus EUR600bn increase in PEPP brings the total package to EUR1350bn with the programme now set to run until June 2021. Expectations on the extension of the PEPP timeframe were more varied and the stated rationale for June was to allow for greater visibility on the inflation outlook.
As expected, a more subdued inflation environment post COVID was the main rationale for the increase in the size of PEPP. At 1.3% for 2022 the new inflation forecast is some way below target and near-term inflation data are set to turn negative. Christine Lagarde also cited the need to ease financial conditions and ensure that a smooth transmission of monetary policy as reasons for upsizing PEPP.
On growth the ECB opted for a projection close to the earlier ‘medium’ scenario with 2020 GDP now seen at -8.7%, albeit with riks seen to the downside. Losses are not fully made up through the forecast horizon with GDP in 2022 remaining 4% below that of the March forecasts. In the alternative scenario of a milder GDP decline of 5.9% this year and a strong rebound, losses are fully made up. While the more severe scenario leaves the Euro-area economy almost 10% smaller at the end of the forecast horizon.
Lagarde was very careful on her comments regarding the recent German constitutional court ruling. She simply repeated the earlier line regarding the favourable ECJ ruling, adding she is confident a “good solution” can be found.
No changes were made to any of the other policy tools.
For a further discussion on what was expected see our ECB Preview from earlier this week.
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