In this framework, the Central Bank, which is expected to take action, is expected to carry out monetary measures through PEPP (Pandemic Emergency Purchase Programme) and TRLTRO tools. Expanding asset purchases and providing banks new financing with negative interest rates are additional monetary measures currently being evaluated by the ECB.
The economy, which lost momentum partially due to the tightening of Covid-19 measures, seems to have entered a slowdown cycle. Especially with the restriction of social contact and mobility, the service sector has entered into a severe recession zone. Although the industrial indicators of Germany, France, Italy and Spain, the four major economies of the region, continue to grow, domestic demand is also suppressed due to the pandemic, and therefore, negative reflection may be in question on indicators related to the manufacturing industry. The recent strengthening of the EUR is another problem for the Central Bank's policies. The strengthening of the EUR both limits the export ability of the region in an environment where global trade is weakened (pandemic, supply chain shortage, Brexit) and increases the risk of deflation by limiting inflationary pressures. October's policy statements and press conference paved the way for further incentives, possibly through the currently preferred tools of the central bank's Pandemic Emergency Purchase Programme (PEPP) and the provision of long-term liquidity to the financial sector.
The most effective option to be used against the stronger EUR will be the further cutting of interest rates. However, we think that this option is not evaluated as it will have a side effect such as a further decrease in deposits in the banking sector. The effects of negative interest rates are already experienced by the ECB with deposit rates of -0.50%. In this system, it is aimed to create a monetary cycle in the economy, rather than the return of the deposit and the parking of money at interest. However, we can say that it has done more harm than good until now.
Therefore, the measure will focus on two expansion instruments, PEPP and TLTRO. Both programs are expected to be extended for at least 6 months (maybe 12 months) until the end of 2021. The increase of PEPP from the current size of 1.35 trillion EUR to 1.8 trillion EUR; Thus, the main scenario is that asset purchases will have a monetary effect in terms of extension to the end of 2021. During this period, there will also be a significant time saving in terms of the fiscal policy operating the response mechanism. Similarly, TLTRO-III operations will be extended until December 2021, and banks will continue to provide cheap liquidity. However, increasing the monetary incentive will have some impact on the economic recovery. In order to break the epidemic effect, re-expand employment and increase employment, companies must be in a position to invest again. For this, fiscal policy measures are important.
It is expected that the ECB will also update its economic projections, taking into account the increasing downside risks during the pandemic period. Accordingly, GDP revisions can be made downwards. At the same time, taking into account the very low inflationary pressures, a downward revision can be expected in terms of the overall inflation outlook.
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