ECB exit date?

From IFR news

COMMENT: ECB – Lane says “done a lot”; signals 1-year pause
Jul 01 2020 08:27 by Divyang Shah
Reuters has an interview with ECB Chief Economist Lane nL4N2E82EV and what stands out is the signal that the ECB after having “done a lot” has essentially given itself a 1-year horizon to reassess the situation. Now this 1-year horizon is in relation to the ECB having extended PEPP until June 2021 that incorporates the ECB’s view that the horizon reflects the period before which “we really know how able the European economy will be [able] to recover from this shock”. That the ECB is signalling a pause is in contrast to market and even our own expectations of a further increase in PEPP this year. We will remain biased toward a PEPP increase on the view that a year is a long time to be reassessing something in an environment where the growth/inflation risks are still to the downside and the evolution of lockdown/virus remains uncertain. If anything, the risks are toward a further downgrade of the growth/inflation outlook and an expansion of PEPP as fiscal support measures are extended. The risk is that the ECB has already incorporated these downside risks in its decision to increase the PEPP by €600bn last month. This might explain why the minutes and ECB’s Mersch were focused on an asymmetrical bias for the PEPP focused on it being flexible to the downside. 1) the minutes highlighting that the envelope should be understood as a ceiling; and 2) ECB’s Mersch said that the ECB would not make use of the full PEPP envelope if it were judged market tensions had eased sufficiently. It was left to Schnabel to inject symmetry to the outlook for PEPP that included the potential for an increase should the situation worsens. The ECB (and Fed) has been surprised by the bounceback as lockdowns have been eased but they remain cautious in interpreting the data and seeing it as not indicative the broader recovery. Q3 will be all about looking past data based on rates of change and focusing more on levels. Afterall if something bounces back from 10 (Q2) to 20 (Q3) after falling from 50 (Q1) then that 100% growth does not give a true picture of what is really happening. This is not your average shock but a multitude of shocks and fiscal support will need to be extended as will support from monetary policy and we remain biased toward a PEPP increase by year-end even if September looks less promising as of today. (Reporting by Divyang Shah) ((divyang.shah@thomsonreuters.com;))

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