Uncomfortable questions the ECB will have to answer next Thursday

At the first meeting of the ECB in 2021, no great news is expected, after the PEPP rose by $500 billion in December. But the economic outlook has since been clouded by virus outbreaks. Last week, both the ECB president and her vice president, Luis de Guindos, seized vaccines’ success. But there are several critical questions for markets that will need to be answered.

What economic implications does the slow application of vaccines and the third wave of infections have?

The economic recovery should take place from the second half of the year. The blocking measures to stop the pandemic are lifted by the end of March, and the vaccines are effectively distributed.

Forecasts for December, which led to a sharp cut in growth, include difficulties at the beginning of the year. It will be time to see if the ECB makes them worse or better after a new coronavirus blow in March. 

Is the ECB ready to use up the 1.85 trillion of the PEPP?

The Governing Council debated a less than 500 billion increase in emergency bonds purchases last month and were keen to emphasize that they may not spend the entire program. But the current economic context could generate concern in the markets due to the lack of commitment from the ECB.

ING senior bond strategist Antoine Bouvet said that the commitment that exists to carry out the package would make the markets nervous. 

What does the ECB want from inflation?

A key indicator of long-term inflation expectations for the eurozone, closely followed by the ECB, is close to 18-month highs, thanks to the rebound in energy prices. While they are positive signs for inflation, an economy that has not started to recover is not so good news. The key question is how far they are willing to let inflation run before curbing the stimulus. 

What is the level of exchange rate acceptable to the ECB?

Lagarde has said that the ECB would be extremely vigilant to the impact of a strong currency on prices. She may be asked the acceptable level again for the ECB, considering that a euro above 1.2 dollars poses profound deflationary forces and puts the recovery at risk.