LONDON (Reuters) – The European Central Bank meets on Thursday with investors hoping that policymakers will deliver yet more stimulus for an economy ravaged by the coronavirus pandemic.
A 1.85 trillion euro ($2.04 trillion) fiscal package proposed by the European Commission to lift the region’s economy eases the pressure to act speedily.
But for many economists the case for more immediate ECB stimulus is compelling — the euro zone economy contracted at a record rate in the first quarter with an even worse performance anticipated in the second.
Here are five key questions on the radar for markets.
1. By how much could the ECB expand asset purchases?
Delaying fresh stimulus would keep the pressure on Europe’s politicians to deliver and allow more time for the ECB to assess how EU bond issuance will impact its asset purchases.
Many economists nevertheless expect the 750 billion Pandemic Emergency Purchase Programme (PEPP) to rise by 500 billion euros. ABN Amro thinks it will double in size.
Latest ECB meeting minutes, recent policymaker comments, dire economic data and expectations for a further surge in government spending and bond issuance suggest a June move remains likely, economists say.
(Graphic: The ECB’s QE programme – https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkdamrpm/Pasted%20image%201590680791300.png)
2. Surely Europe’s recovery fund plan eases pressure on the ECB?
The ECB has long urged euro zone leaders to do more to support growth — hopes that were given a major boost last week by the recovery fund proposal.
The plan still requires unanimous support from EU members and is unlikely to delay more policy action now, economists say.
If ratified, the plan would mark a step towards mutualised debt as a major funding tool for the first time. The prospect of joint EU bonds could encourage the ECB to buy more supranational bonds.
(Graphic: ECB’s cumulative public bond buys – https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzqwejpw/Pasted%20image%201590679336970.png)
3. Could the ECB add so-called “fallen angels” to QE?
Many analysts expect the ECB to start buying the bonds of companies that have lost their investment-grade credit ratings during the pandemic. But many policymakers are sceptical about buying such risky debt.
The ECB disappointed markets in April when it chose not to include “fallen angels” in quantitative easing, having just eased rules to allow lending against recently junk-rated assets.
Jeroen van den Broek at ING expects some 100 billion euros-worth of euro zone corporate debt will lose investment-grade status over the next 12-18 months.
For an interactive version of the below chart, click here https://tmsnrt.rs/3gvEbom.
(Graphic: Reuters poll-European Central Bank policy outlook: https://fingfx.thomsonreuters.com/gfx/editorcharts/jznvnbzglvl/eikon.png)
4. What will the latest economic forecasts show?
ECB chief Christine Lagarde now expects the euro zone economy to shrink between 8% and 12% this year, against an earlier forecast of a 5% to 12% contraction.
ECB forecasts due on Thursday are likely to reflect the more bearish commentary and may help justify more stimulus.
Focus is also on inflation forecasts as the bank has yet to spell out how the coronavirus crisis will impact price growth.
(Graphic: ECB’s growth forecasts – https://fingfx.thomsonreuters.com/gfx/mkt/jznpnbzonpl/Pasted%20image%201590679166411.png)
5. Has the German court ruling dented the ECB’s ability to do “whatever it takes”?
Germany’s constitutional court ruling in May challenges the ECB’s independence and threatens to muzzle the central bank’s latest bazooka, the PEPP.
The ECB has until August to justify its position or the Bundesbank must stop buying German bonds for the ECB’s QE programme. Lagarde will be pressed on Thursday for the central bank’s response.
Sources told Reuters last week that the ECB is drafting contingency plans to carry out its multi-trillion bond-buying programme without the Bundesbank.
Analysts expect the ECB to stress its independence and commitment to its stimulus schemes.
“The court ruling acts more like sand on the wheels rather than changing the outcome. It’s a complication to the process, but ultimately it won’t change its course, or even slow down the ECB’s decision-making,” said Ilan Solot, currency strategist at Brown Brothers Harriman.
(Graphic: Euro, euro zone bond markets in the coronavirus crisis – https://fingfx.thomsonreuters.com/gfx/mkt/azgpobreevd/Pasted%20image%201590679465183.png)
(Reporting by Dhara Ranasinghe, Saikat Chatterjee, Yoruk Bahceli and Elizabeth Howcroft, Compiled by Dhara Ranasinghe; Graphics by Ritvik Carvalho; Editing by Tommy Wilkes and Catherine Evans)