In a period dominated by recession concerns due to reclosures, it seems that the central banks will not be able to enter into a rapid policy normalization as in 2013 and beyond. The ECB, which increased the total amount of bond purchases by extending the Pandemic Emergency Purchase Program (PEPP) in December, continued without any changes and confirmed the current monetary expansion base. The current PEPP amounts to 1.85 trillion EUR and will continue until March 2022.
Although vaccination is an important step, reclosures caused contraction in the 4Q20 and 1Q21 periods. Although the measures are expected to decrease in the following quarters and the economic activity to increase, considering that there are still risks especially regarding the mutant virus, the risks are downside in terms of economic growth projections. Negative inflation continues to be a problem. There are two important reasons for this: First, restrictions and deteriorating income balance prevents demand recovery. Second, the appreciating EUR is negative in terms of commodity prices, putting downward pressure on inflation. As Lagarde said; There is no exchange rate target, but the bank is following the exchange rate levels. If the value of EUR rises to undesirable levels, the ECB will be involved with additional asset purchases.
The reduction in pandemic effects will be positive, at least in terms of easing the pressure on inflation. Low inflation and recession concerns are a big problem not only for the Euro Area but also for the main economies. It is necessary to look at what kind of year 2021 will pass. The fact that the service sector becomes more active with the decrease of the pandemic effect will also stimulate the demand and increase inflation in the medium term. However, it is important that people have disposable income, so employment has to strengthen. The Fed may start steering from late this year for 2022, but we are not in a time to talk tapering, as Powell noted. The ECB will not be in a position to evaluate tightening before the Fed as the region's economies have more risks in terms of recovery.
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