No surprises ahead of the summer break. The ECB took a breather and kept its monetary policy stance unchanged at its June meeting. During the press conference, ECB President Christine Lagarde said “we are in a good place at the moment”. That moment may last a little longer. If economic developments continue in line with, or slightly better than, the ECB’s forecasts, the ECB will likely remain on hold for the remainder of the year.

No need to do more yet: After the increase of the Pandemic Emergency Purchase Programme (PEPP) to a total €1.35trn at its last meeting in June, and amid the slowdown in the pace of purchases since then, the ECB will not hit its target for quite a while (see Chart 1). Additionally, the Eurozone economy is recovering nicely – in line with our call for a tick-shape rebound. If anything, the incoming data point to a recovery that is a little faster than we and the ECB had expected six weeks ago.

Too early to relax: The ECB stressed that the uncertainty about the outlook is “elevated” and the recovery was only in the “early stages”. The risks to the outlook remain tilted to the downside – Lagarde stressed that the rise in infections in the US is a major concern. Consequently, the ECB reiterated that it would stand ready to provide more support if needed. In the same vein, Lagarde also pointed out that fiscal policy makers should phase out current (un-)employment support schemes gradually to avoid a cliff edge in households’ income and consumption. The case to maintain an aggressive stimulus near-term and stay supportive for a long time remains thus strong (see ECB asset purchases: not proportionate, yet).

Full use of €1.35trn PEPP:A discussion among Governing Council members had recently started about whether the ECB would use the €1.35trn envelope fully. Lagarde clarified that, baring a “significant upside surprise”, the ECB’s would do so. Not using the €1.35trn envelope fully was simply “not in the cards”, Lagarde added. In our view, the ECB has set the bar for not using PEPP fully, thereby, very high – higher than the bar for increasing PEPP further.

See you later this year: With more data published by the time of its next meeting on 10 September, the ECB should have a better idea of the pace of the recovery and the impact of its recent policy decisions by then. As long as the economy evolves roughly in line with a tick-shape recovery, we expect the ECB to maintain its current policy stance. It may not be before the December meeting, when ECB staff present 2023 numbers for the first time, that the ECB will have to make a call again on when “it judges that the coronavirus crisis phase is over” and thus the end of PEPP. In the meantime, it may raise its tiering multiplier, the threshold for which the ECB levies the penalty deposit rate. According to Lagarde, the Governing Council did not discuss it today.

Strategy review: The ECB paused the strategy review it started at the beginning of this year during the Covid-19 pandemic. Lagarde said that the review would resume shortly, with the first meetings starting in September. Lagarde “guessed” that the review would end throughout H2 2021.

Over to you, EU leaders: Lagarde wished EU leaders “luck, determination and a spirit of cooperation” at tomorrow’s EU summit, pointing out that they were “carrying a lot of hopes”.She reiterated that the EU should see to it that the divergence between member states – which existed already before and worsened during the Covid-19 crisis – would not persist. In the introductory statement, the ECB also stressed that the recovery fund would only “reach its full potential” if EU countries implemented “sound structural policies”, somewhat supporting the line of the Frugal Four. In other words, reforms would be as important as money.

Florian Hense

Economist

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