New coronavirus lockdowns by the euro zone’s biggest economies are boosting the chance of preemptive monetary stimulus by the European Central Bank (BCE) this week.Germany is preparing to follow France, Italy and Spain with restrictions echoing those that triggered an unprecedented slump earlier this year.
Bloomberg reported that while most economists and investors still think the ECB will wait until December to expand its bond-buying program, the dramatic shift in risks has put them increasingly on guard for surprise action on Thursday. ”We are starting to hear stronger arguments by market participants for the ECB to lay a firm pre-commitment already tomorrow due to the ‘why wait if you know it will come’ argument,” said Piet Christiansen, chief strategist at Danske Bank. “I have some sympathy with that.”
Christiansen and most of his peers still expect the ECB to wait, but they want to see a signal from President Christine Lagarde in her press conference on Thursday that more stimulus is coming. One option is to use language strong enough to prevent an adverse market reaction, such as a jump in bond yields in some countries.
Most economists foresee a 500 billion-euro ($587 billion) increase in the 1.35 trillion pandemic bond-buying program in December. Policy makers will have updated economic projections then to support an increase, and may have greater clarity over geopolitical risks such as Brexit and the U.S. election.
”I don’t think the ECB will surprise on Thursday,” said UniCredit’s Marco Valli. “The pandemic purchasing envelope is not even half used, so there’s no rush. Certainly there will be a clear message that they will do more in December. ”Policy makers were already worried about the outlook. Even before the new restrictions, euro-area services were shrinking, because of the hit to hospitality, while measures of sentiment have slipped. That’s putting pressure on the ECB to join governments in ramping up support.
The monetary-fiscal double act has been key to protecting businesses and millions of jobs during the pandemic. With the new closures, governments will have to pump more money into aid programs again. Italy approved a new relief package on Tuesday to help sectors hit hardest amid growing protests in cities including Milan and Turin. Germany also plans enhanced assistance.
“I’ve never fully bought the argument that the ECB should wait for the staff projections,” said Frederik Ducrozet, global strategist at Banque Pictet & Cie. “We know for a fact that inflation is already too low and unlikely to reach the target by 2022, what else do they need before they act?”