Over the past weeks, investors have been closely monitoring the European Central Bank’s actions. Naturally, there is a reason for such curiosity. For several months in a row, the regulator has been hinting about additional stimulus measures. Experts believe that it is time for the central bank to act, using all tools at its disposal to shore up a coronavirus-hit economy. Thus, they underscore 5 possible steps that ECB may take to revive the economy.
1. ECB to expand PEPP
Analysts assume that the European financial watchdog is highly likely to expand its Pandemic Emergency Purchase Programme (PEPP) as it has already flagged more emergency bond-buying and cheap liquidity for banks. According to their calculations, the ECB will do it in the near future. At the moment, its volume amounts to €1.35 trillion ($1.63 trillion). The ECB is widely expected to expand the €1.35 trillion ($1.63 trillion) Pandemic Emergency Purchase Programme by another €500 billion and extend it by at least six months until the end of 2021.
2. TLTROs as important policy tool
Market participants are also anticipating the regulator to make cheap long-term loans to banks known as Targeted Long-Term Refinancing Operations (TLTROs). The ECB has already slashed the rate on TLTROs to minus 1% and extended their duration to three years. Analysts do not rule out the extension of the package of collateral easing measures and an adjustment of the tiered rates system. Apparently, these stimulus measures will remain in effect beyond September 2021.
3. ECB to use APP as part of stimulus measures
Experts say that the expansion of the Asset Purchase Programme (APP) is extremely likely, although the PEPP will remain the key tool. Last month, ECB policymakers considered the possibility of extending the PEPP and APP programs. The pivotal feature of the APP is that the volume of asset purchases should mirror the relative size of countries. Therefore, countries with high levels of debt can use the APP to apply for loans in the European Union. The extension of the APP will allow EU countries to agree on budgetary stimulus. Recently, Hungary and Poland have blocked the EU's €750 billion recovery fund. It raises concerns that funding may be delayed.
4 ECB to halt euro's growth
The rally of the European currency poses a great threat to the region as it could further deteriorate the economy and suppress inflation. Versus the US dollar that appears to remain within the bearish trend, the euro is near 2-year highs, consolidating above $1.2100. According to analysts, the EUR/USD pair is likely to continue its upward movement. However, the ECB worries that the euro’s value has got firmly stuck above 1.2000 against the US dollar. "Anything above $1.20 is likely to be a concern for the ECB -- so that is likely to be on their agenda and will be something they address in December," VTB Capital’s global macro strategist Neil MacKinnon pointed out.
5. ECB to downgrade its economic outlook
Many analysts are almost certain that the regulator will worsen forecasts of economic growth and inflation. ECB officials expect the eurozone inflation to keep falling this year. Next year, there might be a rebound but consumer prices will grow more slowly in 2021 than previously anticipated.
