The economic recovery, which got off to a strong start in the third quarter, has been given a boost by the second corona wave and lockdown-like measures across Europe. So says Christine Lagarde, president of the ECB. According to her, the service sector is clearly slowing down. And that's an important note.
The service sector accounts for the lion's share of the economy. When the president of the European Central Bank says that the services sector is clearly slowing down, she is in fact saying that the entire economy is doing so.
No longer standing by
According to Lagarde, a significant slowdown in growth is to be expected in the last quarter of the year. The lockdowns are not only suppressing economic activity in the last months of this year. They also ensure that the economic prospects for the coming quarters deteriorate.
While the bank previously missed no opportunity to report that it is ready to further relax monetary policy if necessary, it went further in the October meeting. The ECB is no longer ready to do anything, the Central Bank is going to do something. What was conditional has now become unconditional.
In-depth policy reconsideration
Lagarde referred to the ECB economists' estimates of economic growth and inflation. These are published 4 times a year, in March, June, September and December. Given the economic situation, it is almost certain that these estimates will be much bleaker than the last edition. Although, feel free to leave out that 'almost certain', Lagarde must have thought. Because she announced that these new estimates will make 'a thorough reconsideration of policy' possible. In other words: it is certain that the bank will introduce new measures in December. It is just not known which measures exactly and how large they will be.
The fact that it could become a large package can be deduced from Lagarde's comments that the board will recalibrate all instruments. She repeated several times that it concerns all instruments and, as if that were not clear, she specifically pointed out that she was talking about 'instruments, so plural'.
Buy more and longer
The bank has several purchase programs running, each of which has its own name, for example the PEPP and PSPP. Analysts will undoubtedly debate which program the bank is ramping up more, but that is largely an academic discussion. The effect is the same, that the ECB will buy more government and corporate bonds and probably for longer. Longer, means at least until 2023 and probably longer.
Seen in this light, it is not surprising if the markets receive quite a Christmas present from the central bankers just before Christmas: the ECB will meet on December 10, followed by the Fed in the US on December 15 and 16 and there is a good chance that the Fed will also further loosens monetary policy.