What to expect from this week’s ECB meeting

The European Central Bank is expected to bolster its stimulus programme this week, even as signs of recovery appear across Europe.

ECB meeting to take place amid economic shock

The European Central Bank (ECB) meeting this week takes place in a very different world from the last one. We have endured tens of thousands of deaths from coronavirus and an economic shock in Europe unlike anything since the Second World War.

Firstly, the bank will have to deal with the awkward topic of its growth forecasts. The March forecasts provided three scenarios, with gross domestic profit (GDP) dropping by 5%, 8% and 12% respectively for 2020. It is likely that the June meeting will see a forecast somewhere between the 8% and 12% drop. Beyond Q2 however, forecasts are even more of an exercise in guesswork than in normal times. Some countries are seeing solid rebounds in activity, to around 70%-80% of normal, while others lag with recoveries of 60%. As a result, we can expect forecasts to change sharply as the year goes on.

Inflation predictions are also difficult to make at this time. Widespread unemployment, falling energy prices and the closure of businesses does not augur well for higher prices, although some council members think supply disruptions will be among the key effects providing some upward lift to prices.

ECB needs to act fast

The ECB’s current PEPP (Pandemic Emergency Purchase Programme) will run out in October. Coupled with this is the German constitutional court ruling, which hovers like a cloud over ECB actions and may take the Bundesbank out of its stimulus programme.

As a result, the ECB needs to act fast, and will therefore choose to increase the size of the PEPP at this meeting instead of waiting to see how markets and the economy behave in Q2 and Q3.

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