The European Central Bank meets on Thursday with investors hoping that policymakers will deliver yet more stimulus for an economy ravaged by the coronavirus pandemic.
FILE PHOTO: The headquarter of the European Central Bank is photographed during sunset, as the spread of the coronavirus disease continues in Frankfurt, Germany, April 28, 2020. REUTERS/Kai Pfaffenbach/File Photo A 1.
85 trillion euro fiscal package proposed by the European Commission to lift the region’s economy eases the pressure to act speedily. But for many economists the case for more immediate ECB stimulus is compelling — the euro zone economy contracted at a record rate in the first quarter with an even worse performance anticipated in the second.1. By how much could the ECB expand asset purchases? Delaying fresh stimulus would keep the pressure on Europe’s politicians to deliver and allow more time for the ECB to assess how EU bond issuance will impact its asset purchases. Many economists nevertheless expect the 750 billion Pandemic Emergency Purchase Programme to rise by 500 billion euros. ABN Amro thinks it will double in size. Latest ECB meeting minutes, recent policymaker comments, dire economic data and expectations for a further surge in government spending and bond issuance suggest a June move remains likely, economists say.The ECB has long urged euro zone leaders to do more to support growth — hopes that were given a major boost last week by the recovery fund proposal. The plan still requires unanimous support from EU members and is unlikely to delay more policy action now, economists say. If ratified, the plan would mark a step towards mutualised debt as a major funding tool for the first time. The prospect of joint EU bonds could encourage the ECB to buy more supranational bonds.Many analysts expect the ECB to start buying the bonds of companies that have lost their investment-grade credit ratings during the pandemic. But many policymakers are sceptical about buying such risky debt. The ECB disappointed markets in April when it chose not to include “fallen angels” in quantitative easing, having just eased rules to allow lending against recently junk-rated assets. Jeroen van den Broek at ING expects some 100 billion euros-worth of euro zone corporate debt will lose investment-grade status over the next 12-18 months.
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