FILE PHOTO: ECB headquarters in Frankfurt
FILE PHOTO: The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany, July 8, 2020. REUTERS/Ralph Orlowski

December 7, 2020

By Dhara Ranasinghe, Ritvik Carvalho and Saikat Chatterjee

LONDON (Reuters) – After months of raising expectations for more stimulus to shore up a coronavirus-hit economy, it’s time for the European Central Bank to deliver — any package at Thursday’s meeting that doesn’t pack a punch is likely to be met with disappointment.

Southern European debt yields have fallen towards record lows, a sign of the confidence investors have that the ECB will announce further bond-buying.

Here are five key questions for markets.

1. Will the PEPP be expanded and extended?

In a nutshell, yes. The ECB has flagged more emergency bond buying and cheap liquidity for banks and now the details of the package must be debated.

Many economists expect the ECB to expand the 1.35 trillion euro ($1.63 trillion) Pandemic Emergency Purchase Programme (PEPP) by another 500 billion euros and extend it by at least a further six months to end-2021.

A 12-month extension may also be considered.

For a graphic on ECB set to increase and extend PEPP?:

2. And TLTROs?

Officials are expected to make cheap long-term loans to banks known formally as Targeted Long-Term Refinancing Operations (TLTROs), another primary policy tool, last longer.

The ECB has already cut the rate on TLTROs to as low as minus 1% and extended their duration to three years from two to encourage banks to finance firms even amid a deep recession.

Economists expect an extension of the generous conditions.

ECB officials may also debate an extension of the package of collateral easing measures beyond Sept. 2021 and an adjustment of the tiered rates system to further alleviate pressure on banks from negative rates.

For an interactive version of the below graphic, click here

For a graphic on Country breakdown of ECB borrowing:

3. Will the ECB discuss using the APP as part of the stimulus?

An expansion in the ECB’s Asset Purchase Programme (APP)cannot be ruled out, although the PEPP will remain the key tool.

According to a recent report, rate setters debated whether the ECB should extend the PEPP, given its unprecedented flexibility, or the regular APP, under which purchases should mirror the relative size of countries.

Offering less generous support for indebted governments through APP could encourage them to apply for European Union loans tied to productive investments.

It could also spur EU states to unlock aid. The EU’s 750 billion euro recovery fund, vital for nations hit hardest by COVID-19, has been blocked by Hungary and Poland, raising concerns that funding will be delayed.

For a graphic on The ECB’s QE programme:

4. How concerned is the ECB about the euro?

A rocketing euro is complicating the ECB’s job as it could further harm the economy and suppress inflation. Against a dollar that appears to be entering a secular bear trend, the euro is near 2-1/2 year highs above $1.21 and close to its strongest in 11 years versus trading partners.

Market positioning is not as stretched as it was in September when euro strength sparked verbal intervention. That suggests the rally has further room to run just as an economic surprise index for Europe is pulling ahead after lagging the United States for most of 2020.

“Anything above $1.20 is likely to be a concern for the ECB — so that is likely to be on their agenda and will be something they address in December,” said VTB Capital’s global macro strategist Neil MacKinnon.

For a graphic on ECB to rein in euro?:

5. Will the ECB’s latest forecasts be cut?

Downgrades to economic growth and inflation forecasts, due on Thursday, are almost certain.

The ECB expects euro zone inflation to keep falling this year and rebound more slowly in 2021 than previously anticipated even as COVID-19 vaccine hopes lift the growth outlook, according to ECB vice president Luis de Guindos.

His comments suggest a cut to inflation forecasts is likely — a prospect reinforced after euro area inflation remained negative for a fourth straight month in November.

For a graphic on ECB set to cut economic forecasts:

(Reporting by Dhara Ranasinghe and Saikat Chatterjee; Graphics by Ritvik Carvalho; Editing by Tommy Wilkes and Catherine Evans)

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