Global Daily – ECB meeting will be all about the forward guidance

The Governing Council meeting this week is set to make the outcome of the ECB’s Strategy Review, with a higher inflation target and the need for a ‘forceful or persistent’ response when close to the lower bound,  operational. At this stage, we think the main changes will be in the form of forward guidance. ECB President Lagarde noted that this week’s meeting would  be ‘important’ and will have ‘some interesting variations and changes’. She added that ‘given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited’.

We think that the tools that the ECB will focus on in its aim of getting inflation to its new goal over the medium term are policy rates and the APP. In its current forward guidance, the ECB links the settings for policy rates and the APP on the outlook for inflation. The onus will likely be on the ‘persistence’ of monetary accommodation. We think that the ECB will strengthen its forward guidance to signal a longer period of unchanged policy rates and net purchases under the APP than markets currently expect. It will also signal that it is willing to increase the APP going forward and change the modalities to increase its room for manoeuvre if needed.

However, concrete steps in terms of the latter, will likely wait until the September or even the December meeting. This is because it will go hand-in-hand with the announcement of the wind down of the PEPP, which seems unlikely to be announced this month already. Indeed, the ECB has signalled that it wants to keep its options open with regards to the duration of the PEPP. Once the PEPP does end, the APP will likely need to be increased from the current EUR 20bn monthly pace.

Looking further forward, we are likely to see the PEPP being replaced by a prolonged period of accommodative policy, with current levels of policy rates and purchases under APP continuing likely through 2023. There is a risk that the PEPP is extended beyond March 2022 because of the risk that the  Delta variant disrupts or even reverses the opening up of economies. However, that is not our base case.