Increased contagion, deflation, negative interest rates and uncertainty are the backdrop when the European Central Bank holds an interest rate meeting on Thursday. Economists expect more relief from the central bank, but not this time around.
Since the European Central Bank’s (ECB) previous monetary policy meeting in September, infection rates have increased in several parts of the world.
In Europe, Spain and France are among the countries that have reported a record number of cases in recent days, and countries such as Germany, France and Italy, the eurozone’s three largest economies, have introduced stricter restrictions.
At the same time, inflation in the euro area has been negative for two months in a row, both in August and September.
When the ECB again holds an interest rate meeting on Thursday, it is once again expected that the central bank will keep the record low interest rate at minus 0.5 per cent.
But there are broad expectations that the central bank will signal that there will be further easing in December.
Increased support purchases
Economists Bloomberg has spoken with expect that central bank governor Christine Lagarde is getting ready to increase the size of support purchases in the corona crisis program PEPP.
This is also the opinion of chief economist Kjersti Haugland in DNB Markets.
– At this meeting, Lagarde will express increased fear of a new downturn and increased downside risk to the economic picture. And she will thus express that there is an increased probability of further easing in fiscal policy. Then it typically points to the December meeting, she says.
– It is still the case that they have a lot of limits to increase their securities purchases within the program they have to meet the crisis with. It is worth 1.350 billion euros, and less than half has been spent.
The central bank increased the size of the PEPP program by 600 billion euros at its meeting in June, and at the same time extended the program until June 2021.
– The framework is still ample to increase purchases, and they have already done so, but not to a great extent. But I think that if we continue to have an unpleasant infection situation with measures in place, then it is a more negative development that the ECB has envisioned, and that indicates more stimuli, says Haugland.
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Haugland receives support from Handelsbanken’s Marius Gonsholt Hov.
He points out that this interest rate meeting is a so-called interim meeting, where the central bank does not present prospects for economic development. It does not happen until December.
– There are quite clear expectations that the ECB must step up the measures, but not many are expecting it already tomorrow. Neither do we. Those expectations are more about the December meeting. Then the staff presents new forecasts for GDP growth and inflation, which provides a better basis for decision-making for the central bank, says Hov, and continues:
– What you can imagine is that you step up the securities purchases, and there is an expectation among analysts that it will be 500 billion euros.
At the same time, there are few expectations that the central bank will do anything about interest rates, he emphasizes.
– It’s longer inside. The measures are about extending and expanding securities purchases.
– Not much in stock
DNB’s Haugland points to the development of infection as the main reason why it is heading towards increased securities purchases.
– The fear that the economic recovery can stop, and even turn into a downturn, has increased recently, she says.
– The key problem is that ESB does not have much in stock. They are already at the negative interest rate, and even if they do not admit it directly themselves, they probably think that further cuts will not have any positive effect on the economy. It can affect the banks, and thus also the real economy.
However, securities purchases will be an effective policy if the desire is to reduce interest rates in particularly vulnerable countries, she says.
– By the ECB lowering these interest rates, those countries get better financing conditions, but for the real economy it hardly has much to say. But the central bank will do something, if not they have thrown away the cards. A central bank will not want to do that.
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Negative price growth
Both Haugland and Hov point out that Wednesday’s interest rate meeting comes at a time of very low inflation in the eurozone.
In August, the area experienced its first deflation in four years, and prices also had negative growth in September.
– What is important about the ECB is that inflation is low, especially total inflation after the fall in energy prices, but also core inflation, says Hov.
– When you have a weak real economic development, uncertain times with corona, then the weak inflation comes on top of it all and becomes a bit like Santa on the load.
At the same time, Haugland points out that inflation is disturbed by temporary factors.
– Inflation has also contributed to concern recently because it has been lower than expected. But it is disturbed by political conditions. Germany and other countries have cut VAT, but it is scheduled to return to normal levels in January.
When the ECB presented its previous forecasts at its September meeting, the bank expected inflation to return to positive territory early next year. For the year as a whole, ESB expects inflation of 0.3 per cent in 2020, 1.0 per cent in 2021 and 1.3 per cent in 2022.