The ECB did not disappoint today, and delivered a whopping 500bn of additional stimulus to the PEPP envelope, bringing the total amount to 1.85tn. As icing on the cake, the central bank extended the program by 9 months, which is 3 months more than what median expectations foresaw.
The TLTRO III was extended by 12 months, while four additional PELTROs and increased access for banks with regards to TLTROs were offered. The adaptations in the longer-term refinancing operations are smaller technicalities that may be less relevant for short-term euro price action, but on the whole, the package was slightly more dovish than market expectations and doubled down to the ECB’s commitment in October to ramp up stimulus given the near term risks of the second wave in the eurozone and the national shutdowns.
While the euro immediately jumped up against the dollar after the policy decision at 12:45 GMT, ECB President Christine Lagarde’s comments during the press conference reversed much of the euro gains initially seen.
In the press conference, she addressed the ECB’s projections on GDP and inflation for the next three years. These are summarised below. The green colours indicate an upward revision from the prior projections while red signals a decrease.
ECB GDP and HCIP forecasts
Growth in 2021 is revised downward from 5.0% to 3.9%, indicating that next year’s eurozone recovery will be less strong than previously anticipated.
The 1.4% inflation in 2023 is a grim change to the forecasts as well and raises the question if the current ECB measures are enough to reach that target of 2% over the medium to long term as the effects of the pandemic gradually ease. The central bank may be holding out to see how much fiscal easing will be brought to the table in the periods to come, but President Lagarde reiterated that the ECB stands ready to adjust all of its instruments as appropriate, not ruling out a rate cut. In case the recovery proves to be stronger than expected, the ECB will tailor the policy tools accordingly, as the massive purchases may no longer be needed.
During the Q&A of the press conference, President Lagarde was asked the inevitable question on the euro’s appreciation. Similar to previous sessions, she stuck to the script and stated the ECB will continue to monitor the exchange rate very carefully. A strong euro is a drag on domestic inflation via import prices, potentially offsetting efforts of the PEPP and other accommodative tools. We believe that the recent euro appreciation sets a low bar for the ECB to turn its attention to the exchange rate for the time being, although a rapid and sustained currency rally could make the bank reconsider its options in the future.
The euro pared back its losses from the press conference as soon as President Lagarde was finished speaking, and rallied to another daily high against the dollar as markets took the overall message of the ECB as a signal the ECB will continue to support growth. Looking forward, the overall policy stance is expected to remain highly accommodative to help the eurozone recover from the scars the pandemic left.
EURUSD rips over half a percentage point higher after ECB boosts and extends pandemic QE
Author: Ima Sammani