ECB minutes to be overshadowed by looming strategy review outcome

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The European Central Bank will publish the minutes of its political meeting on June 9 and 10 on Thursday (11:30 a.m. GMT) as the eurozone’s recovery is in full swing. Policymakers adopted a distinctly conciliatory tone at their last meeting and although not all Governing Council members were satisfied with the maintenance of a “significantly higher rate” of bond purchases, the minutes will likely confirm that hawks remain significantly outnumbered. The euro, which has been battered by the resurgence of the US dollar, could come under downward pressure from the minutes. But more attention to the single currency in the short term is the result of the ECB’s strategy review, which could be announced very soon.

Wind blowing in the direction of the ECB for once

Changing the course of monetary policy is not a priority for the ECB at the moment. The Pandemic Emergency Purchase Program (PEPP) does not expire until March 2022, so there is plenty of time to think about the next step. Additionally, bond selloff has eased – in fact, bonds are in demand again and yields are falling. Finally, the euro has weakened considerably in recent times as the Federal Reserve seems poised to beat the ECB by declining first. All of this means that the ECB can more than afford to take its time before having to decide whether or how the PEPP will be extended.

There is one downside though that will almost certainly come to the minds of policymakers at the next meeting or two and that is the current pace of asset purchases. In March, the ECB stepped up its bond buying program not only to curb an undue rise in eurozone yields, but also to repair the damage after sending the wrong signal to markets by slowing the pace too early in the market. the year.

But the accelerated pace of purchasing may have to slow down soon because, apart from the strengthening of the economic rebound, demand for government bonds seems to be picking up and soaring yields are no longer a problem for the euro zone’s recovery. . Also, the move was meant to be temporary and now that it is almost certain that the Fed will start to cut its stimulus measures over the next few months, the ECB is able to take its foot off the pedal slightly.

Slower buying indices could support the euro

The June minutes could shed light on the firmness of policymakers to abandon the commitment to carry out the PEPP at “a significantly higher rate than during the first months of this year” from the July meeting.

Such indices would be positive for the euro, which is currently struggling to stay above the $ 1.18 level. If the ECB makes it clear that there may no longer be a need to accelerate bond purchases, the Euro / Dollar could rebound above the 61.8% Fibonacci retracement of the March uptrend. May at $ 1.1917.

However, if policymakers fail to provide a timeline on when asset purchases may need to be cut, the pair could slide below the critical $ 1.18 barrier and head for the March low of $ 1.1702.

Revision of strategy could be key to exit from pandemic QE

All in all, a change in the pace of the PEPP is a minor detail and a much more important decision looming is the one regarding the overhaul of the ECB’s monetary policy strategy. Some reports say an announcement is imminent amid “good progress” in recent Board of Governors discussions during a hillside retreat in Frankfurt. But regardless of whether the outcome is revealed in the next few days or weeks, the ECB is unlikely to make a major policy change until the end of the strategy review.

The review could see the ECB’s unusual inflation target of “below but close to 2%” dropped in favor of a more symmetrical target of around 2% used by most other central banks. Another option is to follow the Fed by adopting an average inflation target, although hawkish governors like those in Germany, Austria and the Netherlands are unlikely to ever approve of this.

Defining the inflation overrun

Anyway, President Christine Lagarde will soon have to specify to what extent an overrun in inflation the Bank is prepared to tolerate and for how long. Inflation in the eurozone – although rising – has yet to reach levels like those in the United States. But it might not be long before he does.

This makes the timing of strategy review all the more important as it could determine how quickly asset purchases are reduced. The other potential overhaul that could have a major impact on how policy is set is whether the ECB will decide to look at different measures of inflation, or even launch its own price index.

There is a growing debate on the need to include house prices in Eurostat’s Harmonized Consumer Price Indexes (HICPs). But even if the ECB advocated a new measure of inflation that included housing costs and other costs, the development of a new price index could take several years, so there would not necessarily be d short-term policy implications.

Can the euro zone avoid the carnage of the Delta?

Amid all the upcoming political reviews and decisions, there’s one more thing investors need to keep an eye out for – the Delta variant. Some eurozone countries like Spain appear to be heading towards the UK, with a surge in new infections in recent days, mostly due to the highly contagious Delta strain. If Delta’s outbreak worsens across Europe in the coming weeks, it could derail plans to fully reopen closed sectors of the economy, ultimately delaying any plans to reduce the length of the period. BCE.



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