Door Wide Open for December European Central Bank Easing

Executive Summary

The European Central Bank (ECB) kept monetary policy unchanged at today’s announcement, but its accompanying comments were notably dovish in tone, offering a very clear signal of further easing in December. The onus now appears clearly to be on the economic data to improve perceptibly to avoid that easing, an improvement we think is unlikely. As a result, we now expect the ECB to announce a €500B increase in Pandemic Emergency Purchases in December, to a total program size of €1,850B.

ECB Holds Steady but Signals December Monetary Easing

The European Central Bank (ECB) announced its latest monetary policy decision today. Although the central bank held monetary policy steady, we view the announcement as notably dovish in tone, offering a relatively clear signal that further easing could be forthcoming at the ECB’s December 10 meeting.

The ECB’s main policy tools were untouched. The central bank kept its Deposit rate at -0.50% and repeated that interest rates would remain at present or lower levels until it has neared its inflation goal. The ECB also kept the size of its Pandemic Emergency Purchases Program (PEPP) at €1,350B and said the program will run until at least June 2021. The central bank still has plenty of room for further bond buying within the current purchase envelope.

However, the accompanying comments were very dovish in tone. The central bank said that risks were clearly tilted to the downside in the current environment, and it also said that a new round of staff economic forecasts in December will allow for a fuller reassessment of the economic outlook. The ECB said that on the basis of this updated assessment it would recalibrate its instruments, as appropriate, to respond to the unfolding economic situation. In the post meeting conference, ECB President Lagarde said policymakers agreed it was necessary to take action, essentially sealing a December move.

After today’s ECB announcement, December monetary policy action now clearly appears to be the most likely or base case scenario. We believe the onus is on the economic data to improve perceptibly to avoid further easing at that meeting. An improvement in the flow of economic data seems unlikely however, given the surge in new COVID cases across the Eurozone, the re-imposition of restrictions by several European governments over the past several days, and softness already evident in the service sector PMIs in particular.

As a result, we now expect the ECB to ease monetary policy further at its December 10 announcement. Specifically, we expect the ECB to announce a €500B increase in PEPP purchases, to a total program size of €1,850B. We also expect the ECB to extend its purchase program through until at least December 2021, from June 2021. While it might not be formally announced, we also would not be surprised to see an increase in the weekly pace of purchases following that meeting. We do not expect the ECB to adjust its other asset purchase programs in December, nor do we expect any change to the current Deposit rate of -0.50%.