One of the most interesting ECB meetings is about to end in a few hours today. For sure, it is the most interesting so far this year, as the ECB is put to the test.
The recent rise in the last weeks of the U.S. Treasury yield had spillover effects in other parts of the world, mainly in the advanced economies. For instance, yields in Europe rose too, with the German bund starting a bullish trend. Even the spread between the U.S. – GER spread and its IT-GER peer widened.
Naturally, the ECB is not happy with the unwanted tightening conditions, and it acted already. At the end of February, right on the last trading day, the ECB voiced concerns about the rising yields. Isabel Schnabel, Executive Board Member of the ECB, said that the ECB still has room to ease some more.
Does it? If yes, today is the day to find out by how much and under what conditions, if any.
Expectations from Today’s ECB Meeting
Make no mistake, the consensus is that the ECB will do nothing today. Despite the verbal interventions, there are no facts supporting more easing at this meeting. If that is the case, the ECB will keep the main refinancing rate at 0% and the deposit facility rate at -0.5%. Also, the PEPP duration is seen as unchanged, at least until March 2022, while the reinvestment period remains unchanged too, until at least the end of 2023.
The problem with all these is that Fabio Panetta, who serves on the Executive Board of the ECB, was very explicit lately, arguing that the ECB should not hesitate to increase the asset-buying under the PEPP. Because the weekly data does not show any such increase, the ECB may compensate with such an announcement today. This way, it will add credibility to its own members’ words.
The ECB is known for “jawboning” and for its verbal interventions. Many times it did just that, without following with any actions. For instance, when the EURUSD exchange rate reached 1.20 for the first time in 2020, the ECB promptly intervened, saying that a higher exchange rate is not welcomed.
In the meantime, the EURUSD reached 1.23 before falling back to 1.18, without the ECB to do anything significant. Therefore, the risk of today’s meeting is that the ECB will actually do something. If it eases some more, the EUR will have a green light for further downside.