In view of rising fears of a recession, the ECB ought to pave the best way for additional impetus
© Reuters. The spread of the coronavirus disease (COVID-19) in Frankfurt
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank is expected to resist pressure to come up with new stimulus measures on Thursday, but it is likely to pave the way for action in December as new restrictions curb fears of a new recession-related issue Coronavirus pandemic fuel pass.
Having already put in unprecedented firepower to prop up the 19-member bloc economy, the ECB is in no rush to act as ongoing bond buying could keep markets calm well into next year. Policy makers also seem interested in pushing governments to take the lead.
However, economic hardship is spreading quickly as coronavirus infections rise again, and the ECB is facing calls to signal even greater and longer-term support for an economy that has already seen an unprecedented recession this year.
This means that ECB President Christine Lagarde is obliged to signal the ECB’s commitment to keep funding terms as simple as possible without raising market expectations so much that even substantial support in December would be seen as a disappointment.
“Lagarde has to go a fine line with openness to do more without making a commitment,” said Danske Bank economist Piet Haines Christiansen. “I think the risks are skewed in such a way that the markets (on Thursday) are more likely to be easily disappointed than cautiously surprised.”
The ECB will announce its policy decision at 1245 GMT, followed by Lagarde’s press conference at 1330 GMT.
The problem is that the indicators are showing a rapid deterioration in the outlook, which challenges the ECB’s view that the bloc’s economy will grow back to pre-crisis levels by the end of 2022.
Spain, one of the weakest companies in the eurozone, may already be in recession again, while in Germany, too, the momentum seems to be weakening.
The darkness is unlikely to spread until the coming days, when the largest EU states, including Germany and France, debate new lockdown measures.
New moves may be less severe than in the spring, but they could stay in place longer, increasing the risk of rising bankruptcies and unemployment.
“The economic environment now requires more measures,” said Florian Hense in Berenberg. “In the last few weeks the situation has deteriorated again … economic growth will stall in the fourth quarter.”
Inflation expectations, the main concern of the ECB, are also falling. While the risk of deflation is not yet back on the agenda, inflation is unlikely to return to the ECB’s target of almost 2% in the coming years.
However, the powers of the ECB are clearly limited. With the monthly purchase of debt worth around 100 billion euros, borrowing costs have already risen to record lows, and even the spread between borrowing costs for members of the euro zone is back to pre-crisis levels.
Banks flushed with liquidity are already borrowing for minus 1%, and their biggest fear is the deterioration in credit quality, not the availability of cheap finance.
Once the ECB releases new economic forecasts after its December 10 meeting, it is likely to extend and expand its € 1.35 trillion pandemic emergency purchase program and improve funding terms for banks.
Governments are also expected to continue to be pressured to ensure budget support and eventually agree on a lengthy € 750 billion recovery package for the bloc.