ECB expected to expand asset purchases

The European Central Bank (ECB) will hold its June meeting tomorrow, where it will also update its economic forecasts.

The European Central Bank (ECB) will hold its June meeting tomorrow, where it will also update its economic forecasts. At this meeting, the current Pandemic Emergency Purchase Program (PEPP) is expected to be expanded by 500 billion EUR. In March, the ECB launched a 750 billion EUR PEPP program to tackle pandemic conditions, with the exception of the current QE. 

When we take into account the current liquidity plans of ECB and the previous purchases, it is highly probable that the decision to expand asset purchases will come out of this meeting. In the process of reviving economies damaged by the pandemic period, while the recovery packages continue at full speed, the existing financing conditions will not be tightened for a long time, but will be more loose. Demand recovery is difficult to occur with organic conditions and the risk of deflation increases in this process, the most important macroeconomic bases for expanding purchases. If Bundesbank is to be deactivated after the decision of the German Supreme Court, the fact that the ECB will be more buyers in the troubled bond market of other countries will also emerge as a technical adjustment requirement.

Despite all this expansion policy, we think that further decreasing the deposit rate, which is currently -0.50%, will bring side effects that are hard to cope with. The low profitability banking sector is one of the most important vulnerabilities of the indebted southern Europe countries. The beneficial marginal effect of the movement in interest will be rather limited.

Source: Tera Menkul
Hibya News Agency
 

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