ECB releases the account of its July 2020 monetary policy meeting

  • Financial market conditions had continued to normalise
  • They remain tight and more fragile than before the pandemic
  • Monetary and fiscal measures had brought a considerable improvement in financial conditions since the height of the crisis
  • Market developments might be based on overly optimistic expectations about the recovery package and vaccine developments
  • Uncertainty surrounding the economic outlook remains elevated
  • Some members said PEPP envelope should be a ceiling, not a target
  • Current presumption is to use PEPP envelope in full
  • Expects more clarity about inflation outlook in September
  • Needs more data to assess future path of the economy
  • Full account

There isn't anything new with regards to the ECB's policy stance and their take on recent economic developments. They are very much in wait-and-see mode right now but perhaps, this paragraph on PEPP stands out more than it should:

The argument was also made that the flexibility of the PEPP suggested that the net purchase envelope should be considered a ceiling rather than a target. The point was made that incoming data had surprised on the upside and some of the downside risks surrounding the outlook prevailing at the time of the Governing Council's June monetary policy meeting had receded, increasing the possibility that the envelope might not have to be deployed fully. At the same time, it was recalled that the PEPP had been designed to achieve the dual objective of addressing risks to the smooth transmission of monetary policy across the euro area and risks to medium-term price stability owing to the pandemic crisis. More specifically, it aimed to offset the pandemic-related downward shift in the projected path of inflation. Accordingly, under the baseline scenario in the June Eurosystem staff macroeconomic projections, and in the absence of any significant upside surprises to the medium-term inflation outlook, the current presumption was that the PEPP envelope would have to be used in full.

That said, although policymakers may allude to improving economic developments and upside surprises, the key thing to watch out for is still the market reaction.

If the market starts kicking and screaming, something similar to a taper tantrum, you can bet that the ECB will look to calm the market and ensure that they will not decide too early whether or not to move away from delivering on the full PEPP envelope.

In any case, this will likely be a decision for Q4 or some time in Q1 next year.