A renewed surge in COVID cases across Europe threatens to derail the Euro area recovery. Spain and Italy are the latest countries to impose new restrictions, putting more pressure on already-fragile service sectors. Thursday’s ECB meeting will acknowledge the rising downside risks, but any new policy action is unlikely.

ECB President Christine Lagarde described the recovery as ‘uneven, uncertain and incomplete’ in a 19 October interview with Le Monde. An assumption on further ‘localised containment measures’ was incorporated into the September forecasts, but the scale of recent measures very likely exceeds the baseline assumptions. But with no new forecasts due until December and holdings under the Pandemic Emergency Purchase Programme (PEPP) at just €600bn (out of the current €1.35trn envelope), we expect the ECB to announce no new stimulus this week.

Instead, we expect Lagarde will reiterate that the dual objective of the PEPP – to stabilize markets and bring inflation back towards target – are being met. Yields are now back at pre-pandemic levels, and the ECB views the recent bout of deflation the result of temporary factors such as the German VAT cut, weak demand and the earlier fall in oil prices. The ECB did not sound overly concerned about inflation dynamics in September (core CPI projections were raised slightly), and ECB forecasts already expect headline CPI to remain negative until early next year.