This week’s main economic event is the ECB Forum on Central Banking. A virtual forum replacing the Sintra, Portugal, regular gathering, it nevertheless plays a key role for the end of the year monetary developments.
Today’s policy panel involving a tri-lateral discussion between Christine Lagarde (ECB), Jerome Powell (Fed), and Andrew Bailey (BOE) is the event’s highlight. However, the markets already got something from yesterday’s Christine Lagarde’s introductory speech.
She was not shy in acknowledging the role of the ECB in this crisis. Also, she highlighted that the best case scenarios the ECB is considering already include the possibility of an effective COVID-19 vaccine sooner rather than later. However, until that reality comes, the ECB stands to deliver more at the upcoming December meeting.
The ECB Already Pre-Committed – What Did Lagarde Add?
At the previous ECB meeting in October, the ECB effectively pre-committed to act at the next meeting. It was too early for the central bank to act in October as the new restrictions in Europe were unclear and the U.S. elections uncertainty represented a risk factor.
Yesterday’s introductory speech brought some clarifications about what to expect in December from the ECB. First, Lagarde made it clear that the ECB will not lower the deposit facility rate further in the negative territory. Some economists expected further reduction in the deposit facility rate, but the ECB probably does not see any benefits of doing so as it holds the rate below zero for several years now.
Second, Lagarde also hinted at what the ECB will likely do. Once again, TLTROs (Targeted Long-Term Refinancing Operations) come into the discussion with likely more favorable terms and even longer maturity. The Pandemic Emergency Purchase Programme (PEPP) will likely be extended to 2022 and, perhaps, the pace of purchases under the program, too. Also, the other purchase program, APP, is likely to be boosted next year too.
What traders must learn from yesterday’s speech is that the ECB, like other central banks in the world, prefers quantitative easing to straight rate cuts. After all, by the time the rates come close to zero, the effectiveness of negative rates comes into question. As such, by aggressively increasing the quantitative easing programs, the ECB hopes to bring the yields lower on the curve, supporting banks and, in the end, the overall economy.