The ECB Doesn’t Know What to Expect in the Near Future - Forex News by FX Leaders

The ECB Doesn’t Know What to Expect in the Near Future

Posted Friday, May 1, 2020 by
Skerdian Meta • 2 min read

The European Central Bank announced new PELTROs yesterday or non-targeted pandemic emergency longer-term refinancing operations in an effort to support liquidity conditions in the euro area financial system and contribute to preserving the smooth functioning of money markets by providing effective liquidity backstop.

ECB president Christine Lagarde looked very uncertain regarding the future of the economy yesterday, hinting that they might increase the monetary spending if the economy doesn’t recover as expected when we get out of this lockdown. The ECB released part of the economic bulletin earlier today as below:

ECB notes in a pre-release of its economic bulletin

  • Euro area GDP could shrink by 5% to 12% this year
  • Euro area real GDP could fall by around 5% (mild scenario), 8% (medium scenario), and 12% (severe scenario) this year
  • Under the severe scenario, Q2 quarterly real GDP growth could be -15%, followed by a protracted and incomplete recovery; +6% in Q3, +3% in Q4
  • Under the severe scenario, real GDP is expected to remain well below the level observed at the end of 2019 until the end of 2022

The headline isn’t so much of a surprise since it is the same as what Lagarde has already highlighted in her press conference yesterday. This just adds more colour to it. ECB chief economist Lane also made some comments on the situation, hinting at increasing the size of PEPP.

Comments by ECB chief economist, Philip Lane

  • We will further adjust our instruments if warranted, that includes size of PEPP
  • We will adjust PEPP composition as much as necessary, for as long as needed
  • Non-fundamental volatility in spreads impairs the smooth transmission of policy
  • It is a basic task for the central bank to counter such destabilising forces

This just reaffirms the same message that they communicated from the policy meeting yesterday. As for the yields spread itself, the bond market wasn’t too convinced by the ECB messaging as 10-year Italy and German yields spread remains at over 230 bps.

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About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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