The European Central Bank (ECB) is set to announce its Interest and Deposit Rate Decision at 12:45 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 10 major banks.
The ECB is projected to add around €500 billion to its Pandemic Emergency Purchase Program (PEPP). The additional stimulus is mostly priced in by markets. ECB President Christine Lagarde could comment on the euro’s rising exchange rate, which depresses inflation and exports. Any hints of cutting the deposit rate, which is at -0.50% would send the euro down.
Natixis
“We expect the ECB to increase the size of its PEPP purchase programme by EUR400 B and the deadline for PEPP to be extended until the end of next year. We furthermore think that the period for which banks can get a 50bp discount for TLTRO loans will be pushed back to early 2021. Even though a vaccine is now within reach, we still think that the overall tone of the meeting will remain very cautious, signalling the ECB’s general willingness – also with one eye to the exchange rate – to add further stimulus if needed. The overall tone of the press conference will be dovish and Mrs Lagarde will clearly signal that more easing is possible – including a rate cut – should this be deemed necessary. With respect to the exchange rate, Mrs Lagarde will stress that the ECB does not have an exchange rate target in mind, but that the exchange rate is one input in their assessment of the inflation outlook.”
ING
“We expect the ECB to decide on the following next week: An increase in the PEPP programme by up to EUR500 B euro to extend this programme until the end of 2021, an increase of the monthly APP purchases from EUR20 B euro to EUR40 B euro, open-ended, an extension of the generous TLTRO interest rate by six to 12 months, an increase in the tiering facility to exempt a greater part of the banks’ liquidity from the negative deposit rate and potentially, including so-called Fallen Angels (corporate bonds downgraded during the crisis) into the corporate bond purchasing programme. The aim of all ECB measures will be to extend the current very accommodative monetary stance, rather than increasing it. While still vague enough to keep the door open, Christine Lagarde will try to signal next week that this new round of monetary action will really be the last one.”
Rabobank
“The ECB is set to ‘recalibrate’ its policy with a very clear message that easing will be based around PEPP and TLTRO. We think the ECB will choose stability over flexibility, and that they will opt to extend both PEPP and the TLTRO discount by 12 months; effectively pinning policy through 2022H1. By shifting focus on the duration of PEPP, the ECB effectively blurs the line between forward guidance and (implicit) yield curve control. So while the size of the package may initially disappoint the quite inflated market expectations, its duration should support the rates space for an extended time.”
Danske Bank
“We expect the ECB to add another EUR400 B to the current PEPP envelope running at least until end-2021. The ECB may also increase the APP purchase rate, but this is less powerful than the PEPP and it is not as important for the overall ECB monetary policy stance unless the purchase rate is increased significantly to, e.g., more than EUR40 B/month. The ECB will not commit to a monthly target under the PEPP. Still no rate cut, but repeating the option to cut if needed.”
Nordea
“New easing measures next week are almost a certainty. PEPP will be expanded by EUR500 B and extended but the pace of purchases is unlikely to increase quickly, as the ECB is happy with the current levels of financing conditions. New TLTROs with easier terms will be announced. Further rate cuts are not on the agenda. Immediate market reaction could be a small disappointment, but the ECB’s measures should keep yields and spreads low for longer. Staff forecasts set to show inflation below target even in 2023.”
ANZ
“If the ECB decides to maintain a cushion and extend the program for 12 months, an increase in the PEPP package of EUR650 B to around EUR2 T is plausible. A six-month extension could warrant an increase in the facility of EUR350 B. We are leaning towards a 12-month extension, while the median market expectation is for an increase in purchases of EUR500 B. Of course, the outcome will depend entirely on the ECB’s recalibration of what is needed to achieve its inflation mandate. Updated macroeconomic projections will also be published. We forecast 2021 inflation will rise by 0.7% vs the ECB’s current 1.0% projection. We also think it is feasible that the ECB will further relax the collateral requirements for TLTRO III borrowings and extend the lifetime of the facility beyond three years (five years has been muted). Another possible option is to consider cutting the interest rate on TLTRO borrowings (currently -100bps to -50 bps), although we think that is less likely. We do not expect any material changes to the PSPP, although the emergency envelope could be extended.”
ABN Amro
“Our base case remains for a EUR500 B step up in the PEPP in December. The amount available in 2021 left over from the current PEPP envelope is projected at roughly EUR600 B, meaning total PEPP firepower of EUR 1100 B for 2021. In addition, we think the ECB will signal net asset purchases will continue for a very long time. The duration of PEPP will be expanded through to at least the end of 2021 and possibly into 2022. On the same theme, we expect the APP – the programme which will likely continue after the end date of the PEPP – to be stepped up by EUR10 B a month taking the total APP amount to EUR360 B in 2021.”
TDS
“We look for the ECB to keep its policy rate on hold but deliver further easing via the PEPP and TLTROs. For the PEPP, we’re in line with consensus in expecting a EUR500 B boost and a 6-month extension to end-2021. And for the TLTROs, we look for a 25bps reduction in the interest rate, plus a one-year extension through to June-2022. The new staff macro forecasts are likely to show small upgrades to 2020 and 2022 GDP growth, and a steeper downgrade to 2021 growth. For HICP, we look for a reduction in 2021-22, based largely on crude oil prices as well as the weaker momentum in underlying inflation, and for the first 2023 estimate to come in at only 1.4%.”
Deutsche Bank
“The recalibration will most likely focus on PEPP and TLTRO; and the intention of the recalibration is to maintain favourable financial conditions for longer, not to reduce the level of rates or yields further. We expect an extension by 6 months of the PEPP net asset purchase period and the TLTRO3 discounted interest rate period beyond their current expiry in June 2021. We also expect an increase in the PEPP envelope (EUR400 B) and other moves on TLTRO3 (e.g., additional tenders, possibly an adjustment to the lending benchmark, etc). No discount rate cuts are expected but the ECB will likely communicate very strongly its willingness and capacity to extend support even further and to ease the policy stance if needed to achieve its objectives. In effect, stronger informal forward guidance. Communications will likely be a key line of defence against a rising exchange rate.”
MUFG
“The ECB has already clearly signalled that it is set to ‘recalibrate its instruments’ and while we would argue the forecasts to be published won’t change dramatically, we are likely to see a EUR500 B increase in PEPP, which will be utilised to extend the degree of monetary stimulus at least through to the end of 2021. However, with the EUR120 B addition to the APP ending this month, the overall PEPP size increase could be EUR600 B in order to ensure the current QE pace can be maintained. TLTROs will also be added to the 2021 calendar, likely on the same terms as now (potential for rate of -1.0%). However, we expect the deposit rate to remain at -0.50%. Overall, we do not expect any major surprises from the ECB and hence the euro is set to remain well supported within what looks like a new trading range between 1.2000-1.2500.”
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