The ECB increased its asset purchase envelope under the PEPP by EUR 600bn. This was higher than the consensus estimate of economists (EUR 500bn), but below our own base case (EUR 750bn). The horizon for the purchases was extended to at least the end of June 2021 (from the end of this year previously). Meanwhile, the ECB communicated for the first time that the maturing principal payments from securities purchased under the PEPP will be reinvested. Reinvestments will continue until at least the end of 2022. The extension of the horizon of the PEPP and the decision to reinvest the proceeds of maturing securities under the PEPP were in line with our base case. No other policy decisions were made.
We judge that a further increase in the PEPP envelope will likely follow later this year. This reflects the deep recession in the economy and the significant disinflation it will trigger over coming years. Indeed, the risks of a sustained period of modest deflation are now significant. Furthermore, we estimate additional corona-shock related government funding needs for this year of around EUR 1050bn. The PEPP is still insufficient to mop up this year’s supply (given that not all purchases are government bonds) let alone the still large bond supply that will come to the market next year.