Intesa SanPaolo : The April monetary policy meeting proved to be entirely interlocutory.
Replies to journalists‘ questions have been rather hasty, while more explanations would have been welcome about the pace of PEPP’s net purchases.
The news? none, to be honest.
No changes to the monetary policy framework were expected, and none emerged. Forward guidance is also completely unchanged in its formulation, as regards rates1, PEPP2, APP3 and reinvestments4. The press release confirms that the purchases will be made in this quarter “ at a significantly higher pace than during the first months of the year „, albeit “ flexibly according to market conditions“. The answers to the many questions about the PEPP were rather evasive. Ms Lagarde did not explain why the ECB considers the increase in purchases to be „significant“, except for referring to the monthly averages of flows and the need to consider gross as well as net purchases. Frankly, it would not have been to prejudice the ECB’s credibility to provide a more extensive technical explanation. With regard to future decisions, the president dismissed any discussion on the procedures for closing the PEPP as premature and linked any reduction in purchases in the coming months to data rather than calendar. Lagarde was also too evasive about recent developments in market rates, limiting herself to stating that the overall financial conditions remained stable. Instead, it would have been appropriate to explain why they remained stable despite the modest increase in long-term rates and the appreciation of the exchange rate.
Recovery starting from Q2. Significant changes in the assessment of the scenario are more likely in the wake of the publication of the staff forecast. On this occasion, President Lagarde reiterated her previous assessments on risks (mainly to the downside in the short term, but more balanced in the medium term). She dared to forecast a rebound in GDP in the 2nd quarter after the probable contraction of Q1. This was already in the staff forecasts published in March, but then the president abstained from making the forecast her own; now she is more confident about it. In the medium term, the ECB expects a „firm rebound“ in economic activity.
Monetary policy outlook
The next monetary policy meeting is on the agenda on 10 June. On this occasion, the staff will present the update of the macroeconomic forecasts, including the alternative scenarios. We expect the forecast framework to be substantially confirmed, but with a further reduction of the uncertainty around the central forecast and a further cautious rebalancing of risks – if the recovery in the second quarter turns out to be as expected. At the same time, however, the ECB will continue to reiterate that financial conditions must remain accommodative at this stage of the recovery. The pace of purchases under the PEPP could be reduced, but in net terms it could make little difference, given that the increase in recent weeks has been anything but overwhelming. We do not expect changes in forward guidance, official rates and the size of net APP purchases. For the moment, we believe that the first reduction in the stimulus will occur with the end of the PEPP net purchases, on March 31, 2022, but that the APP will continue until 2023 and that there will be no changes in official rates in the next two years
1“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics”.
2 “The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) […] until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over”.
3 “The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates”.
4 “The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. […] The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates”