The ECB on hiatus – economy



The monetary policy meeting of the European Central Bank (ECB) on January 21 is unlikely to give rise to any new announcements, after the major recalibration of monetary policy instruments announced in December. The risk context remains high in the face of the worsening health crisis and new containment measures that could affect the growth profile for the first and second quarters. However, data for the fourth quarter of 2020 confirmed better than expected economic activity, with a rebound in activity, especially industrial activity. Therefore, as Christine Lagarde pointed out last week, the ECB’s economic forecasts for December, with growth forecast at + 3.9% in 2021, down compared to September (5%), remain valid. . The ECB should reiterate its ability to adjust all its tools in order to achieve its objective: to ensure favorable financing conditions in the euro zone. But at this stage, nothing justifies announcing new measures. In fact, the recalibration of monetary policy instruments seems adequate given the context. The PEPP (Pandemic Emergency Purchase Program) asset purchase program, extended in December in terms of volume and maturity (by 500 billion, and until March 2022 at least) is well calibrated to maintain favorable refinancing conditions in the euro zone. The ECB has the capacity to buy as many bonds this year as it did last year, when fiscal deficits should be smaller. In addition, other investment programs will be implemented, in particular the SURE program, designed to allow States which grant partial unemployment to their companies to finance these measures under the best possible financial conditions; and the European Union recovery plan. Finally, the appreciation of the euro against currencies, of 3% since December and of 0.6% at the global effective exchange rate, remains manageable at this stage. On the other hand, Christine Lagarde should recall the essential role of budgetary policies in supporting the recovery. The very clear roadmap presented in December was well understood by investors, as demonstrated by the low tensions in the markets in the face of political difficulties in Italy. The ECB will not accept financial fragmentation in the euro zone, and offers great visibility, by anchoring short-term rates to very low levels and influencing the entire curve.