ECB June meeting: Slightly boring

Status quo on monetary policy: The Governing Council opted for continuity, pledging to maintain net PEPP purchases at a “significantly higher pace than during the first months of the year”. A dovish move given the solid growth forecasts upgrade, but not a surprise for markets as it was well telegraphed by Governing Council members over the past few weeks. Maintaining the “significantly higher” pace of PEPP purchases over the summer makes sense in our view in terms of risks management. Indeed we see at least three reasons justifying a “wait and see” attitude before potentially altering the current course: 1) how the market deals with a complicated summer for the Fed, 2) gauge the strength of the consumer rebound and 3) developments on the pandemics front (vaccination vs. variants race still ongoing). In addition, we flag that there is no pressure to reduce the pace of PEPP purchases: to fully use the 1850bn envelope by end March 22, a monthly average pace of EUR 75bn is required, just a tad below the current pace. We do not read too much into the “net” PEPP purchases addition in the June monetary policy statement - we see it as clarification in case redemptions heavily fluctuate in the coming months. Other monetary policy instruments were left unchanged.

Strategy review is coming amidst a divided Governing Council: Questions on the pace of PEPP, tapering discussions, and inflation outlook dominated the press conference. Although President Lagarde emphasized there was unanimity on the introductory statement, she acknowledged that there was a debate on the pace of PEPP purchases, the balance of risks and inflation assessment. Internal divergence within the Governing Council is not new (partly explained the vague/ “holistic” definition of financing conditions) and will likely intensify ahead of the conclusion of the strategy review. It is not 100% sure yet that the outcome will be unveiled at the 9 September meeting (Lagarde mentioned H2 21). We think the central bank needs to address the ambiguity of its definition of price stability – “below but close to 2%” – to make it clear it is properly symmetric. Such symmetry would allow for some inflation overshooting, necessary to re-anchor long-term inflation expectations towards 2%. But we are a bit worried about the timing. Even if the strategy review is supposed to provide guidance for the long-term, its conclusions may be impacted by the cyclical conditions prevailing at the time of the debate. Activity data and surging confidence point to strong consumer demand in the months ahead and solid recovery, while inflation pressure concerns are unlikely to abate, so it could play in the hawks’ hands.

A pretty bullish growth outlook, but core inflation improving only gradually. We were surprised by the magnitude of the growth upgrade: 0.6pp to both 2021 and 2022, with the risk assessment being shifted to balanced.  It was justified by faster progress of the vaccination campaign/ reopening, the incorporation of the Next Generation EU (NGEU) fiscal support and spillovers from US fiscal policy packages. While we have revised up our near term forecast to 4.4% yoy in 2021, we remain more cautious on 2022 (3.7% yoy) as we see slower reabsorption of unused labour, corporate fragility and persistent households precautionary savings.  On the prices front, 2021 headline inflation was upgraded to 1.9% on the back of oil prices, supply disruptions and base effect from German VAT reversal. But what matters is core inflation at the end of the policy horizon and it has been lifted up by just 0.1pp to 1.4% yoy as ample labour market slack is expected to keep a lid on wages growth, despite stronger than initially expected recovery. This would call in our view for persistent substantial monetary policy accommodation, in line with our expectations that purchases under the Asset Purchase Programme (APP) are likely to double (to EUR40bn) once PEPP stops.