ECB Delivered on Its Easing Promises

The ECB June interest rate decision and press conference did not disappoint – the central bank delivered on its promises, and more. While keeping the interest rates unchanged (refinancing rate, deposit facility rate, marginal lending facility), it surprised in many ways, creating higher volatility on the currency market. 

ECB June Decisions

As suggested by some of the ECB Governing Council members during the previous weeks before yesterday’s decision, the ECB was ready to surprise. And it did.

The market was fully priced in an extension of the PEPP (Pandemic Emergency Purchasing Programme) of EUR500 billion – the ECB delivered €600 billion. Moreover, it extended the program until at least one year from now, June 2021. Furthermore, it decided to reinvest the PEPP proceeds until the end of 2022 minimum.

The surprises came from the first part (€100 billion more) and the third one – the decision to reinvest the PEPP proceeds. The latter, in particular, allows the ECB to deviate from capital keys for a longer period of time and more substantially.

Capital keys currently provide limitations regarding the various asset purchasing programs, as each country has a specific share. However, in a situation like the coronavirus pandemic, with different impact on different countries, capital keys provide some restrictions in terms of the support the ECB could give but cannot offer. With today’s decision, this is not an impediment anymore.

Financial press representatives did their job and grilled ECB’s Lagarde regarding the German constitutional court ruling or whether the decision to reinvest the PEPP proceeds was unanimous. She gracefully responded that no, the decision was not unanimous (Nordic states most likely opposed it), and that the German constitutional court should read the ECB accounts and find their answer there.

If this was not enough for the markets, the staff projections regarding the Euro area GDP were not so bad as expected. They show a decline of -8.7%, albeit with downside risks. As for the inflation outlook, no surprises there – was revised lower from 1.5% to 1.3% in 2022, as expected.

The initial market’s reaction was for the Italian spreads to fall abruptly, and the Euro to rise across the board. EURUSD, in particular, traded with a bullish tone all week, as well as the EURJPY. By the end of the press conference, both pairs tripped stops above 1.13, respectively 123, with an extended move to the 1.1360 area for the EURUSD and almost 124 for the EURJPY.

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