ECB signals further stimulus

Despite taking no action at the October meeting, the European Central Bank (ECB) used the opportunity to lay the groundwork for further easing at its next meeting in December. The Governing Council rightly acknowledged worse-than-expected deterioration in the economic outlook, in light of renewed acceleration in the spread of the virus and the heightened level of restrictions on social activity across Europe.
 
Interestingly, President Lagarde, approaching the first anniversary of her appointment, emphasised that the policy "recalibration" will involve all of the ECB’s policy instruments, not just an increase in the size of the pandemic emergency purchase programme (PEPP). This message was presumably intended to highlight the numerous policy choices available (including deeper negative interest rates). It also gives the ECB more flexibility to find the best mix of instruments for December.
 
The latest data across the Euro area is clearly pointing to a reversal in the tentative recovery seen through the summer. The newly announced lockdowns, while less dramatic than those back in March, are still likely to deal a significant blow to economic momentum throughout Q4 2020 and early 2021. In fact, we believe there is a very high probability the Euro area economies are going to slip back into recession this winter.
 
In this regard, the ECB may indeed need to do more in December than increase the size and duration of the PEPP (our expectation is an increase of EUR 750bn, which is above consensus expectation of EUR 500bn). Potential policy actions, in order of likelihood, could include extending targeted longer-term refinancing operations (TLTRO) bank funding and cutting the funding rate more deeply negative; expanding asset purchases to other assets (e.g. bank bonds); and stronger forward guidance on interest rates and asset purchases. Cutting the deposit rate would probably be too controversial, though this option could still be used as a signalling tool, especially in the case of significant EUR strength, depending on the outcome of the US elections.
 
The next few weeks will be challenging for the ECB as it tries to decide on the best policy action in December as monetary policy effectiveness remains under stress. Apart from assessing the likely impact of the pandemic on the economy, policymakers might also need to react to other developments such as the US elections and Brexit negotiations, depending on their impact on markets and overall financial conditions. This will be a busy and long winter in lockdown with fiscal policy once again becoming the main driver of any rebound as the second wave passes through.

 

 

 
 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

© 2020 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

Share:
 
 

Want more insights like this?

Get our free, monthly e-newsletter bringing you valuable insights, opinion and education.

Subscribe