Strategy Review, tick, next? Five questions for the ECB


Expected until recently to be a quiet gathering before the summer break, the European Central Bank’s July 22 meeting is shaping up to be a key event following the release of its long-awaited strategy review.

Under the new strategy unveiled on July 8, the ECB will target inflation of 2% and tolerate higher inflation when interest rates are near rock-bottom, as they are now.

“July looked like a meeting that could have been cancelled,” said Carsten Brzeski, chief economist at ING Germany.

“Now it’s become more exciting after the review, given different interpretations of what it means and holds for future policy changes.”

Here are five key questions on the radar for markets.

  1. How will the ECB change its forward guidance?

The ECB is expected to change its policy guidance to reflect the new 2% inflation goal and possibly commit to a forceful monetary policy response to achieve that aim.

Under current guidance, the ECB will buy debt for as long as necessary and keep rates at current, record-low levels until it sees inflation “robustly converge” to its target.

Its updated guidance must highlight the “room for manoeuvre” it has given itself on inflation, or risk losing credibility, Governing Council member Mario Centeno said last week.

“We think that the ECB will strengthen its forward guidance to signal a longer period of unchanged policy rates and net purchases under the Asset Purchase Programme (APP) than markets currently expect,” said Nick Kounis, head of financial markets research at ABN AMRO.

  1. What is the future of the PEPP?

Changing forward guidance could be the easy part. Addressing what happens to the 1.85 trillion euro ($2.2 trillion) PEPP emergency stimulus scheme, which expires next March, could be trickier and a question the ECB delays until September.

While an announcement extending the PEPP cannot be ruled out, there are two reasons why ECB chief Christine Lagarde may choose to bat away questions on the topic.

First, the ECB has said emergency bond buys will remain elevated in the third quarter and its next review falls in September.

Second, latest staff forecasts are released in September and the ECB may prefer to wait for updated inflation and growth estimates before acting.

  1. Will the ECB boost its Asset Purchase Programme?

The ECB faces pressure to show it is serious about its new 2% inflation goal. That means it could beef up the 20 billion euros a month APP – introduced in 2014 to tackle a previous crisis and governed by stricter rules – once the PEPP ends, and add in some more flexibility.

“It’s very likely that the APP will be recalibrated in terms of its size and even perhaps into something different,” said Frederik Ducrozet at Pictet Wealth Management.

  1. Have downside risks to the economy increased?

Rising coronavirus infection rates, driven by the infectious Delta variant, are forcing more European countries to reimpose activity restrictions, possibly crimping economic recovery.

Nearly 90% of economists poll said new COVID-19 variants were the biggest risk to the euro zone economy, which they expect to grow at a healthy 4.5% this year.

The ECB could address the outlook in a new simplified pre-news conference statement.

  1. How serious are the divisions on the Governing Council?

ECB policymakers debated trimming stimulus in June as the recovery gathered pace but found “broad agreement” to maintain an elevated level of support, according to the published account of that meeting.

While divisions have become apparent in recent weeks, COVID-19-related economic uncertainty could provide an opportunity for policymakers to set aside their differences.

“Even if you believe in the need to tighten policy, it may be better to wait for September given the uncertainties,” Pictet’s Ducrozet said.