ECB View: Undeterred ECB heads for a new round of QE – Following comments yesterday from BdF Governor Villeroy, that the ECB ‘will most likely have to go further’, the President and Vice President of the ECB gave very much the same message today. Speaking to the Committee on Economic and Monetary Affairs of the European Parliament, Luis de Guindos asserted that the Governing Council ‘remained more determined than ever to ensure supportive financial conditions …we continue to stand ready to make further adjustments to our monetary policy measures should we see that the scale of the stimulus is falling short of what is needed’. This reflected that ‘the economic situation is evolving rapidly’. Meanwhile, Christine Lagarde asserted that the ECB will ‘continue to do whatever is needed… to deliver on that mandate’ and that the ECB was going ‘beyond the normal and conventional tools’ given the ‘most severe economic crisis in peacetime’. She also highlighted downside risks from a second wave of the virus and the possibility that the damage to the economy proved to be more permanent. When asked about Germany’s Constitutional Court ruling on the ECB’s PEPP, she made clear that the Governing Council was ‘undeterred’ and asserted that ‘the ECB is accountable to the European parliament and driven by its mandate’. We remain of view that the ECB will step up its PEPP by EUR 500bn before long. (Nick Kounis)
BoE View: Much weaker growth forecast means more QE is coming – The Bank of England kept monetary policy on hold today, with Bank Rate at the effective lower bound of 0.10%, and the asset purchase target kept at GBP200bn (taking the total stock to GBP645bn). Two members of the 9-member Monetary Policy Committee voted for asset purchases to be increased by another GBP100bn, and Governor Bailey sent strong signals that the MPC is willing and able to increase asset purchases if necessary, noting that the next MPC meeting would come before it reaches its current caps on purchases. Indeed, if the BoE’s new growth forecasts are anything to go by, an expansion of QE looks inevitable to us. Under new assumptions of a prolonged and strict lockdown lasting to early June, with a slow easing of restrictions over a four-month period thereafter, the BoE now expects a 14% contraction of GDP in 2020, with an equally dramatic 15% snapback in 2021. By our calculations, this leaves the level of GDP 1.1pp below end-2019 levels, and 4.2pp below trend GDP (roughly, where it would have been absent the pandemic). Bailey characterised this forecast as ‘optimistic’ – presumably in reference to the strength of the recovery – and indeed even with these new forecasts, they are still less negative than our own forecasts in terms of where they see the ultimate level of GDP by end-2021 (we expect GDP to be 2.8pp below 2019 levels, and 5.9pp below trend by end 2021).
Looking at current trends for the pandemic in the UK – which implemented lockdown measures at a later point in its outbreak than many other countries – we concur with the BoE that a significant easing of measures does not look likely in the near-term. As such, we are currently reviewing our growth forecasts and will publish new estimates following the release of Q1 GDP next week (13 May). Where we disagree with the BoE is on the strength of the recovery, as we think the second-round effects (for instance higher unemployment) are likely to be bigger given the length and severity of restrictions in the UK. We therefore think more action will be needed from the BoE. At a minimum, we expect a GBP100bn increase in the asset purchases target at the June MPC meeting, with a risk that it follows the Fed in adopting unlimited asset purchases, and potentially in future involving caps on government bond yields to anchor markets (similar to the Bank of Japan’s yield curve control policy). (Bill Diviney)