A new meeting of the ECB is coming, and it is scheduled for 11 March. The event could change the fate of the pandemic emergency purchase programme (PEPP), with which ECB President Christine Lagarde has deployed 1,850 billions to combat the effects of Covid in the economic field and to contain the spread. especially in the most indebted countries.
However, the German Bundesbank is intolerant of this monetary policy and hopes to close the Pepp as soon as possible.
In fact, Althea Spinozzi from BG SAXO stated that “The ECB will have no alternative but to increase purchases under the Pandemic Emergency Purchase Program to slow down the sell-off of European sovereign bonds. In February, European stocks lost around 1.2% in value which, excluding the sell-off recorded during the Covid pandemic last March, is the highest since Donald Trump took office in January 2017. Even if the yields remain at historic lows, there is a risk that if they continue to rise, economic conditions will tighten in the countries most affected by the pandemic, such as Italy and Spain”.
Furthermore, in mid-February, in an interview with a Bavarian newspaper, Weidmann (German economist and president of the Deutsche Bundesbank) reported that it will be necessary to withdraw monetary stimulus as soon as it is foreseeable that we will reach the inflation rate we have set for ourselves. as a goal. In fact, he believes that the inflation rate will not remain as low as last year in the long run. And if inflation rises, according to Weidmann, prices in Germany could rise beyond initial forecasts.
However, Spinozzi recalled that the Central Bank’s goal is precisely to maintain price stability and reduce the differences in financing conditions between businesses and households in the euro area. In order to do this, the ECB has adopted various measures, which cannot cope with a rapid widening of the spread with respect to the Bund in the countries highly affected by the pandemic, which could turn into a serious problem for Europe.
“Therefore,” Spinozzi added, “we expect the ECB to increase its bond purchases under the Pandemic Emergency Purchase Program (PEPP), which remains largely untapped. The ECB can purchase up to 1.85 trillion euros under this program. However, so far it has only taken a little over 800 billion euros and purchases have declined in the last quarter. We believe Christine Lagarde will highlight the importance of sustained support for the economy and expansion of monthly purchases under the PEPP program at the ECB press conference next week. It should be enough to see European sovereign bonds recover their losses, especially in Spain, where the Bonos-Bund spread has widened faster than its peers”.
Fabio Panetta, Italian member of the Executive Committee of the European Central Bank, put forward the hypothesis of a control of yields by the Eurotower, since it is necessary to counteract the increase in the slope of the curve of nominal yields weighted by GDP., considering that “last week euro rates on all maturities, including risk-free ones, remained above the levels recorded earlier this year”. So “there is no reason to hesitate to increase the volume of purchases and to spend the entire budget of the PEPP – or even more, if necessary”.