Lagarde Has Done Another Good Job

Olivia Álvarez (Monex Europe) | The ECB delivers on market expectations and steps up the total amount of quantitative easing under PEPP purchases by €600 billion. The rise outperformed the consensus call by at least some €100 billion, bringing along a stronger-than-expected market reaction. The program firepower, worth €1.35 trillion now, is set to channel the main recovery mechanism by the ECB, which is vocally reinforcing its accommodative stance amid the current recession environment. The expansion on the program comes at a critical juncture, as markets begin to question whether the tool would run out of steam by the third quarter of the year, as over a third of the program had already been exhausted. In line with previous ECB´s virus response, Lagarde has done another good job in preemptively addressing unnecessary market speculation. The euro has rallied over half a percentage point instantly as ECB´s strong support to the Eurozone economic recovery broadly offsets the easing effects of a broader monetary base available in the economy; while periphery yield spreads also shrink.

The extension of the horizon for net purchases under PEPP, from the end of 2020 to at least the end of June 2021, has only a slightly balancing effect on the reinforced policy message. The extended conditions of the program guarantee the sustainability of the program at the pace of purchases already implemented to date – some €90 billion per month on average. The latter is crucial to ECB’s reinforcing intentions, since it could be expected that financing needs ease as the worst economic effects of the pandemic passes by, leaving some extra spare room in ECB’s hands. In any case, the main takeaway from Lagarde’s statements is that the ECB abides by impending funding needs in the Eurozone, while also stands firm on long-term commitments on monetary stability and symmetry across the area. Downgraded macroeconomic projections play a smaller role into further dampening the already bleak economic outlook, but instead serve as a solid channel to justify ECB´s action and avoid further criticism from legal observers. The bar for a larger euro appreciation stands relatively higher after today´s ECB announcement, as the currency has already priced a large amount of monetary support. The European Commission recovery fund, on the other hand, stands as the potential Eurozone and currency additional boosters, as the ECB has once again highlighted in today’s presentation.