The European Central Bank is widely expected to extend its huge quantitative easing programme as it tries to stimulate the economy.
The initial interest rate announcement is due at 12:45pm BST, with ECB president Christine Lagarde to address the press conference in Frankfurt at 1:30pm BST.
Here are some of the things to look out for:
Bond purchase increases
Quantitative easing was the centrepiece of the ECB’s initial response to the pandemic, with €750bn in bond buying announced on 18 March. The question today is whether it will be expanded or whether the central bank will hold fire until July.
Many analysts expect the ECB to up buying by €500bn, as purchases at their current rate are expected to run out by October.
Derek Halpenny, head of research at MUFG, an investment bank, said:
We think today is the day in which the ECB needs to reinforce the perception of European authorities finally getting to grips with the scale of the Covid-19 hit with further QE action.
A failure to act today would imply consideration is being given to only running the program until September which would result in considerable anxiety amongst investorsthat would result in an immediatetightening of financial market conditions.
Seema Shah, chief strategist at Principal Global Investors, said:
Despite the ECB only having spent a third of the €750bn [Pandemic Emergency Purchase Programme], anything less than a €500bn expansion will be a disappointment and could undo the recent weeks of market strength. Although equity markets seem to believe a V-shaped economic recovery is underway, the reality is that the euro area economy continues to struggle under the weight of the coronavirus crisis and the ECB cannot afford to delay additional stimulus.
Focus is also on whether the bank will expand purchases to include “fallen angels” – companies that have lost their investment-grade ratings during the coronavirus crisis.
That would give the ECB more room for manoeuvre and help parts of the economy that might need it more.
Thoughts on the eurozone’s fiscal stimulus
The EU is wending its way towards a recovery fund to pull together governments across the bloc into a massive fiscal stimulus. But with sensitivities around the politics of risk sharing (opposed by some northern European countries), Lagarde has a delicate balance to strike.
Commerzbank told clients that the desire to keep pressure up on governments could lead to the ECB delaying its QE announcement:
It will be a very close call with the hawks potentially swaying a consensus-minded President Lagarde to defer the announcement, also to keep pressure on the politicians to deliver on the EU Commission’s €750bn Next Generation EU Fund.
Paul Donovan, an analyst at investment bank UBS, said:
ECB President Lagarde will be happy that someone is doing fiscal stimulus (as the pandemic is a problem for fiscal policy, not central bank policy). Today’s meeting should continue to emphasise the need for quantitative policy to support financial markets and ensure sufficient liquidity in the economy.
Updated economic forecasts
Everyone and their dog knows that the eurozone economy is in recession, but the question is how deep is it.
Lagarde has already dismissed the “mild” scenario of a 5% fall in output this year. That leaves a decline of between 8% and 12% in GDP – twice as deep as after the 2008 financial crisis.
If inflation forecasts are also weak that would support the case for more stimulus from the ECB.
The German court ruling
Looming over the ECB’s bond purchases is the German constitutional court ruling that it may have exceeded its mandate by directly financing government spending. The Karlsruhe court said the ECB must carry out a “proportionality assessment” within three months in its 5 May ruling.
Lagarde has insisted the ruling will leave the bank “undeterred” in battling the crisis. Acting now could make it less likely that any support is withdrawn at a later date.
Principal’s Shah said:
Close attention will also be paid to any hints that that last month’s German Constitutional Court ruling will tie the ECB’s hands in future, with the euro’s longest winning streak in six years at risk. A defiant tone, dispelling those concerns, would serve Lagarde – and the euro – well.
