Market Note Ahead of the ECB Minutes

The start of the second wave of novel coronavirus (Covid-19) outbreak in some countries of the 19-member eurozone has added an additional risk layer to the outlook for the economy, which is struggling to recover after bottom levels of April. At the same time, renewed investor confidence, already fragile due to the outbreak, has shifted the focus of markets to developed country monetary policies. Especially in July, the emergence of the second wave in the Covid-19 brought up the possibility that it could be experienced in other Eurozone countries in an environment where many measures were loosened, and the European Central Bank (ECB) brought the attention of the markets to the minutes of the July meeting in terms of how policy makers should act.

In the face of economic activity, which slowed sharply by measures taken by eurozone countries’ authorities to limit the global shock and outbreak of coronavirus in the first half of the year, the European Central Bank did not change its current interest rates. However, the bank that used 750B EUR long-term Pandemic Emergency Purchase Program (PEPP) decided to expand its swap line with 6 leading central banks in the world in order to meet the liquidity needed in global markets and then expanded PEPP by 600 billion euros to a total of 1.35 trillion euros.  At its July 15-16 meeting, the Bank did not change its current asset purchase programme, and pledged to continue its net asset purchases until it was confident that the economy had recovered from the impact of the pandemic. The President of the European Central Bank, Christine Lagarde stated that actual and expected employment, earnings losses, economic uncertainties, the outlook for the evolution and exceptional height of the pandemic, continue to create pressure on consumer spending and business investments, and added, “Loose monetary stimulus continues to be needed.” Lagarde also reiterated his rhetoric that the Committee will do whatever it takes to support growth and inflation.

PEPP Against the Covid-19 Wave II

Using the PEPP in order to minimize the downside risks in the Eurozone economy due to the Covid-19 and to alleviate the disinflationary pressures, the Committee may make use of some of the policy tools considering that second wave in some Eurozone countries may spread to others. Market participants will look for some clues on whether the Committee will take any action against these possibilities in monetary policy meeting minutes that will be published at 13:30 (GMT+2). On the other hand, additional steps to support the recovery of the Eurozone economy, which has been confirmed to be in recession in the second quarter of 2020, and the approach of the Committee members on this issue will be important to the markets. Furthermore, the signals in the minutes regarding the change in the speed of the asset purchase program, especially due to the fluctuation of 10-year European bonds at the 0 level, will be taken into consideration.