The ECB Needs To Increase PEPP At Least €350-400 Bn

Gilles Moëc (AXA IM) | A potential side-effect of the “Next Generation” package is that national governments expecting “federal” resources gradually coming their way would choose to limit their ambitions on their own, “ordinary” fiscal stimulus. We have already noticed outside Germany some hesitation on the quantum of discretionary measures. National governments must be reassured on their domestic financial conditions and this is why massive ECB intervention is still needed. Although purchases through the Pandemic Emergency Purchase Programme(PEPP) have retreated from the peak at 8.5bn per day at the beginning of May, the latest pace is still consistent with all the €750bn being spent by the end of September, while the ECB has pledged to maintain it until at least the end of the year. Mechanically, the ECB would need to “top it up” by at least €350-400bn –i.e. to bring it above the symbolic level of 1 trillion euros –to be comfortable until December. Communication from the ECB before they went in “purdah” was very open to such extension. Political economy factors would favour such a move next week already instead of waiting until the July meeting. Indeed, there is no point in delaying decisions to incentivise governments to “do their bit” since the European Commission has already released its project. Yes, since every time the overall quantum is raised it becomes more difficult to comply with the limits to quantitative easing which the German Constitutional Court has explicitly incorporated in its reasoning, doing it at the first Governing Council since the Court ruling could be seen as provocation, but equally not moving now –while the market consensus has shifted towards a June decision –could be seen asasignal the central bank is sensitive to Karlsruhe’s pressure. We continue to think that signalling that PEPP would be reinvested over a long horizon would be welcome –it would give the central bank more time to re-converge towards the capital key and would be powerful guidance for the market. Finally, we expect for this week a decision on keeping the fallen angels –entities losing their investment grade status –eligible to quantitative easing operations.