Tuesday, 07 September, 2021
ECB Bank views
Summary of ECB Analyst Views
• Most analysts expect the ECB to announce a slowdown in PEPP purchase rate, with a decision on the 2022 policy mix delayed until the December meeting.
• Inflation forecasts are expected to be revised higher, with medium-term inflation still below target, while there is slightly less agreement among analysts on the direction of forecast revisions for medium term economic
growth.
Barclays
• Given the improvement in economic conditions, the ECB is expected to announce a reduction in the pace of PEPP purchases and potentially replace reference to “significantly higher” with “slightly higher”.
• In practice, this could mean the ECB purchasing EUR60-70bn per month via PEPP, in addition to the EUR20bn/month bought through the APP.
• Barclays expects modest upward revisions to economic growth and inflation forecasts for 2021 and 2022, although the 2023 inflation projection is expected to remain below target.
• Given that improving forecasts and a reduction in the PEPP pace risk being interpreted hawkishly by the market, the ECB could stress that conditions for a broader change to monetary policy are not in sight yet, that the decision to reduce the purchase rate is not the start of tapering and that the ECB will maintain ample and persistent monetary accommodation.
• The ECB could signal that the APP would be recalibrated if the PEPP ends in March 2022 and that if needed the PEPP could also be extended beyond that point.
• An announcement on the size and pace of QE (APP and/or PEPP) for 2022 is likely in December. Barclays expects a EUR700bn expansion of the ECB balance sheet via asset purchases in 2022.
Bank of America
• A small reduction in the PEPP pace is expected to be announced at the September meeting, with decisions on concluding PEPP, upsizing the APP and forward guidance deferred to a later meeting (likely December).
• PEPP is expected to end in March 2022, but a small volume of purchases after this date cannot be ruled out.
• When PEPP ends, APP is expected to be upsized to EUR40-50bn/month for at least 12 months with smaller purchases after that. In addition, forward guidance on APP will be changed and could perhaps become datedependent.
• Staff macroeconomic projections will show upgrades to the growth and inflation forecasts, although there will be no substantive policy implications given the limited change to the forward trajectory.
BNP Paribas
• Slowing PEPP purchases in September is more likely than not.
• The PEPP will be concluded in March, with an expanded and more flexible APP taking over. However, a decision on this is unlikely before December at the earliest.
• Prolonged monetary accommodation is here to stay, with APP net purchases set to continue until early 2024. Moreover, the first rate hike is not expected until mid-2024.
Commerzbank
• The ECB is likely to announce a slower pace of PEPP purchases for the fourth quarter.
• However, given recent comments from GC members, the ECB is likely to postpone a fundamental policy decision on PEPP.
• Moreover, any adjustment to the PEPP pace for this coming quarter is likely to be modest given the risks to economic activity (Delta variant, supply bottlenecks etc).
Danske
• With the economy recovering and financial market conditions benign, the ECB will announce a slowdown in the pace of purchases at the September meeting, but will stress that this is not tapering.
• Purchases under PEPP are expected to be similar to the January/February level of EUR60bn/month.
• The bigger QE calibration ‘battle’ is expected to take place in December and so the ECB will try to keep the September meeting as uneventful as possible.
• Danske stress that transferring PEPP flexibility to APP should not be taken as given.
Goldman Sachs
• Given the constructive economic outlook and improvement in financing conditions since June, the ECB is expected to lower the PEPP purchase pace to around EUR65bn in Q4.
• While the GC is expected to have initiated discussion on the conditions required to end PEPP, no significant news on the post-PEPP landscape will emerge at the September meeting. A decision on concluding PEPP
is likely to come at the December meeting.
• The updated macroeconomic projections will show a slight upgrade to the inflation forecasts with a 0.1pp increase in the 2023 figure leaving medium-term inflation still below target.
• While GS believes it possible that APP purchases could be temporarily increased to contain net duration supply after PEPP is exhausted, an open-ended APP increase is seen as less likely given the bond scarcity in core markets and a binding capital key allocation.
HSBC
• Given the improvement in financial conditions, the expected drop in sovereign issuance towards the end of the year and the recovery in growth and inflation, it would be difficult for the ECB to continue conducting PEPP at a significantly higher pace.
• As such, the pace of PEPP is expected to revert to ‘normal’, which would reduce the cliff edge when PEPP expires in March.
• In practice, this could mean EUR15bn of purchases per week, rather than EUR20bn. In turn, this would mean purchasing EUR1.8trn of asset by next March, rather than the full EUR1.85trn envelope.
• HSBC expects a small upward revision to the 2023 inflation forecast, but this will leave inflation still below the 2% target.
ING
• An announcement of tapering will not be on the cards next week. However, it is possible that the ECB could communicate a hypothetical exit plan.
• Tapering clues could come from how the ECB judges when the pandemic is over. This could refer to herd immunity, infection rates, or the economy and inflation returning to the pre-crisis path.
• ING questions whether front loading of asset purchases to preserve favourable financing conditions is still needed. However, the ECB is likely to stick with this strategy for now since doing otherwise risks being
interpreted as de facto tapering.
• The ECB has become more dovish over the summer with its new monetary policy strategy.
• This recent dovish shift was confirmed by comments from Philip Lane and Isabel Schnabel who argued that low inflation is still more of a risk than inflation that is too high.
• Staff macroeconomic projections will show slight upward revisions to growth and inflation for this year, but hardly any changes for 2022 and 2023.
JP Morgan
• Staff macroeconomic projections will show upward revisions to growth and inflation forecasts.
• With higher staff macroeconomic forecasts and easier financing conditions, there is a strong case for reducing the pace of purchases under PEPP. However, JPM argue that there are difficulties in interpreting the framework for “maintaining favourable financing conditions”. Nonetheless, JPM still comes down on the side of expecting a modest step down in the purchase pace.
• JPM also believe that that the hawks will agree to sufficiently dovish language along with the announcement on the PEPP pace.
• Beyond the current decision, JPM expects the ECB to announce a new “recovery PEPP” with a EUR500bn envelope, a duration of around 18 months and some (but not all) of the flexibilities of PEPP
Lloyds
• A comprise agreement could be reached among policymakers to allow for a slight reduction in the PEPP pace, but this is not assured.
• There will be an upward revision to short-term inflation in the new staff macroeconomic projections, but the ‘transitory’ argument for medium-term inflation will prevail.
Morgan Stanley
• Given uncertainty over the economic outlook, the doves are expected to win out on the GC with the PEPP purchase pace being maintained at around EUR80bn through to December.
• Furthermore, any decision on QE after PEPP will be delayed until December.
• Growth and inflation forecasts are expected to be revised higher.
NatWest
• Given the improvement in growth and inflation dynamics, coupled with loose financial conditions, the ECB is expected to abandon the “significantly higher” PEPP purchase rate.
• This could mean lowering PEPP purchases to ~EUR15-17bn/week from the current EUR18-20bn/week.
• Although growth and inflation projections are likely to be revised higher, the medium-term inflation projection is expected to remain below target.
• The distance of current inflation expectations from the 2% target justifies a persistent accommodative monetary policy stance when PEPP ends. This is likely to come in the form of a renewed and bolder APP that should benefit from quasi PEPP-like flexibility.
• NatWest expects to see QE purchases slowing later this year from the current ~EUR100bn/month to EUR60- 80bn in March 2022 with further tapering until H2 2024.
• The first policy rate hike is not expected to come until late 2024 or 2025.
Nordea
• Although the time to end pandemic bond purchases has not yet arrived, Nordea expects the ECB to announce a slowdown in the pace of purchases at the September GC meeting, given that financing conditions now appear very easy.
• While dropping its pledge to conduct PEPP at a significantly higher pace, the ECB will also insist that it will not mark the first step of tapering.
• Signals from GC members suggest that a decision on when to end PEPP will not be taken until December.
• A revision to the forward guidance on rates is more likely to take place at the December meeting.
• When PEPP is eventually wound down, Nordea expects the ECB to boost monthly APP volumes. Moreover, no policy rate hikes are expected before 2024.
• Updated staff macroeconomic projections will show upward revisions to growth and inflation in 2021. Nordea does not expect any significant revisions to the ECBs view on inflation in 2023 given that much of the recent acceleration has been attributed to temporary factors.
Rabobank
• The improvement in the economic outlook and financial conditions will allow the ECB to reduce the pace of PEPP – to EUR60bn/month- during the fourth quarter. President Lagarde will stress that this does not constitute a tapering signal, or a signal that PEPP willconclude in March.
• If the GC do not announcement a pace reduction in September, then extending PEPP beyond March and/or substituting higher APP purchases becomes more likely.
• Decisions on the 2022 policy mix will be postponed until December.
SEB
• Although the Governing Council is split, SEB expects a decision to be made on reducing the PEPP pace during the fourth quarter to EUR60-65bn/month from EUR80-85bn in Q2/Q3.
• Inflation forecasts will be revised higher over the forecast horizon, with the medium-term projection still below target.
• The ECB will also reiterate that stands ready to be “forceful and persistent” when rates are close to the effective lower bound, its commitment to preventing a premature tightening of financial conditions and maintaining the flexibility of the PEPP envelope.
• A more fundamental decision on the future of PEPP is not expected until December. SEB maintains that the GC will opt to extend the duration by three months to mid-2022.
• As a result, the ECB could wait until March before announcing changes to the APP.
• No changes in policy rates are expected before 2024, which means that the APP may run well into 2023.
• However, if the ECB decides to end PEPP on schedule, the APP could be modified in December.
Société Générale
• The ECB may decide to reduce the pace of PEPP purchases in Q4 and drop reference to “significantly higher” from its communication, but will stress that this does not constitute tapering and that it can flexibly increase volumes again if needed.
• The inflation profile will be revised higher, albeit with medium-term inflation still below target. Growth forecasts can be pushed up for 2021, but potentially revised lower for 2022. This would not be sufficient to
have any monetary policy implications.
• Discussion on ending PEPP will be shaped during the autumn with an announcement likely at the December meeting.
TD Securities
• The ECB is expected to announce a slower pace of PEPP purchases at the September meeting, which will be somewhere between EUR60-80bn/month.
• The GC will not provide any further indication of the PEPP lifespan at the September meeting, other than reiterating that it will not end before March 2022.
• The language around the PEPP pace could be changed to “higher” relative to Q1, from the currently “significantly higher”, or to “a slightly slower pace than during recent months”.
• The slowdown in purchases mean that the full PEPP envelope may not be used.
• Growth projections are likely to remain broadly intact, while the near-term inflation profile will be revised higher. However, the medium-term inflation forecast will remain below target.
• TD Securities expects the APP of EUR50bn/month from April 2022 onwards. A decision on APP could come at the January 2022 meeting.
• A decision on TLTROs could come in December.
• No change in policy rates is expected until 2025
UBS
• The September decision on purchases under PEPP will be a balancing act. Economic growth and inflation have improved and financing conditions have become more favourable, but the ECB’s forward guidance has become more dovish, the Delta variant poses risks to economic activity and staff macroeconomic projections are likely to show medium term inflation still below target.
• Ultimately, UBS believes that the ECB will continue conducting the PEPP at a significant pace, but perhaps dropping its commitment to purchasing at a ‘significantly higher’ pace. This could give the ECB’s decision a slight dovish tilt and would indicate that the ECB does not intend to prolong PEPP beyond March.
• The 2021 growth forecast is expected to be revised higher, while the 2022 projection will be nudged down and the 2023 figure will be left unchanged. Inflation forecasts for 2021, 2022 and 2023 are also expected to
inch higher.
• A decision on the duration of PEPP is expected in December and UBS expects the programme to be wound down in March. The ECB will also announce that the APP will be beefed up to ensure continued monetary support.
• However, should the Delta variant trigger new mobility restrictions in the autumn, there is a risk of the ECB extending PEPP by 3-6 months and raising the envelope by EUR500bn.
UniCredit
• Easier financing conditions, higher inflation forecasts and lower sovereign issuance towards the end of the year will motive a moderate slowdown in the PEPP pace for Q4 – probably somewhere between the Q1 and Q2/3 levels.
• President Lagarde will stress that moderating the PEPP pace constitutes a technical adjustment rather than a tapering signal.
• Given upgrades to the growth and inflation forecasts, the GC seems convinced that March will be the appropriate date to conclude PEPP. However, further evidence of how the pandemic is evolving – particularly
with respect to the Delta variant – will be needed before making such a decision, which suggests that December will be the announcement meeting.
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