Christine Lagarde says the GDP is expected to drop between -6 and -12% for 2020

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Philppe Waechter (Ostrum AM) The main point on the ECB meeting is the large uncertainty contained in the GDP forecasts. Last March, the ECB forecast was +0.8% for 2020. Today, Christine Lagarde said the gdp was expected to drop between -6 and -12% for 2020. That’s a huge revision reflecting uncertainty for the foreseeable future.

The ECB main decision is linked to the real economy as conditions for the TLTRO can lead to new loans from banks to the real economy. The interest rate at which banks can borrow at the ECB is 25bp lower. The large uncertainty on the business cycle implies less constraints for the financial sector in order to avoid a collapse of the economy with the risk to go lower than -12%.

Peltro operations are technical measures to ease the TLTRO operations adding liquidity in the money markets when it’s necessary between TLTRO operations.

Yesterday the Fed said we’ve done a lot to limit risks, we can go further but we need more information on the duration of the pandemic. We expect it will work.

On the ECB side, the point was to say: we were too optimistic last month and we now have in mind a measure of the crisis and we’ve adjusted our policy.

Both want to limit the risk on the gdp trajectory and they don’t want to have a lot of companies’ bankruptcy. Therefore they have enlarged the number and the form of monetary policy instruments.

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