Now, not till December, or not at all? Not a day goes by without another member of the European Central Bank (ECB) calling for more monetary easing – though always with the caveat, "if necessary". And so is the ECB about to floor the monetary gas pedal, or not?  

Since March, the ECB's bond purchases have clearly stabilized the capital markets, as can be seen from, among other things, the ECB’s financial conditions index, which is again almost as loose as immediately before the crisis. In addition, fragmentation of the interest rate environment within the euro zone has been avoided. Instead, the yield spread on Italian government bonds over German Bunds has narrowed significantly. Thus, one of the key objectives of the Pandemic Emergency Purchase Program (PEPP) has been fulfiled. But its second goal, returning inflation to the path targeted before coronavirus erupted, has not yet been achieved.

That failure needs to be put in context. Even before the crisis the central bank consistently failed to meet its inflation target.It tried to remedy that by resuming bond purchases. But Covid-19 has not only loweredinflation. It may also have pushed further into the future the time when price rises pick up significantly. The prospects for economic recovery, too, could hardly be more uncertain. Coronavirus infection rates have risen significantly. Many regions are back in lockdown. With these unfortunate and powerful brakes applied, growth is likely to falter.

In this environment, the ECB is likely to remain true to its mandate. It will step on the monetary policy gas and emphasize its intention to do all it deems necessary to support the economy and the capital markets.

But when? In our view, not this month, but in December, when the ECB’s new projections for growth and inflation to 2023 will be available. The policy vehicle of choice is likely to remain the PEPP, an emergency instrument that can be deployed flexibly. An interest rate cut is unlikely – and indeed, in our view would be rather counterproductive. The October 29 monetary policy meeting is likely then to be no more than preparatory. The ECB will depress the monetary policy accelerator again in December and the likelihood is that an enlarged PEPP will be  put on the road with a licence to drive until the end of 2021. The central bank will hope that it takes the euro zone economy with it, out of the Covid-19 slowdown.


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