Pressure on ECB for increasing asset purchases

The atmosphere before the October 29 ECB meeting is not very positive in the context of increasing Covid cases and closure measures. Euro Zone economies are slowing down.

The atmosphere before the October 29 ECB meeting is not very positive in the context of increasing Covid cases and closure measures. Euro Zone economies are slowing down. The euro zone composite purchasing managers index fell from 50.4 in September to 49.4 in October, pointing to worsening conditions, just below the 50 threshold. The problematic structure of countries such as France, Spain and Italy is deepening, and more Covid measures will increase the difficulties.

 

No action was taken at the meeting in September, and there was no adjustment on the PEPP side. The dynamics at the time were not that bad, we were even talking about the economic-slowing effect of the strong EUR. However, the biggest change since then has been uncontrollable Covid cases across the continent. This risk, which we always underline, occurred even before the winter era and could create a second wave in the economy as in real life. Unless the epidemic can be brought under control, the impact of monetary moves will be limited and will not solve the real problems. Therefore, Lagarde will seek help for financial support in her speech.

With the increasing downside risks in the economy, it is seen that the economic projections in September remained at an optimistic point. The ECB revises its economic expectations every two meetings. So the economic projection changes will be at the December meeting. Extending asset purchases under PEPP could be an option. There is a possibility that it will be at this meeting as well, but ECB will continue to keep the additional expansion option active even if it does not take action. However, as we said, monetary policy is already too loose and Eurozone governments will need to increase financial aid. Because in an environment where the epidemic hits economic activity and situations such as curfew and state of emergency return, the possibility of looseness of financial conditions to create efficiency is zero. It is difficult for Europe to overcome its problems… The economy has entered a slowdown cycle and the restrictions imposed by the increasing Covid cases will deepen the problematic situation. Policy pressure on the European Central Bank and fiscal expansion pressure on governments are increasing.

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