ECB preview: wait and see mode
The manufacturing sector continues to be a forceful engine for the euro area recovery. In April manufacturing PMI in all the four largest euro area member countries continued to increase and was close to or even above 60, indicating strong demand and activity. Interestingly, despite continued flare-ups and need to tighten restrictions here and there, services PMI has also increased and is now close to 50. Admittedly, the services sector is quite diverse – hotels, restaurants and other tourism-dependent sectors remain in doldrums, while IT, financial and real estate activities have few reasons to worry. Even the most negatively affected sectors can smell than the economic summer is near, thanks to accelerating vaccination.
- Economic developments have been slightly better than expected in March and April.
- We expect the ECB to keep its main policy instruments unchanged.
Inflation pressures are still rather muted in the euro area compared to the US, where CPI inflation was 2.6% in March. In the euro area, inflation increased to 1.3% in March, so far mainly due to more expensive oil and other commodities. Core inflation remains close to 1% and is unlikely to move much higher before economies fully open up and start going on all engines.
Given recent economic developments and the vaccination process, the ECB has few reasons to change its monetary stance during the upcoming Governing Council meeting. Thus, we expect no changes in base interest rates, asset purchase programmes or the speed of asset purchases. Government bond yields have risen since the start of the year but have stabilized recently thanks to accelerated asset purchases under the PEPP. ECB is likely to reiterate that it stands ready to maintain its ultra-accommodative monetary policy stance. We expect asset purchases under PEPP to end before mid-2022, as currently promised by the ECB, while purchases under other asset purchase programmes will continue at least until the end of next year and probably even longer.
Nerijus Maciulis, firstname.lastname@example.org, +370 5 258 22 37
Heidi Schauman, email@example.com, +358 50 328 1229