ECB preview: Mrs Lagarde’s first real test

The spreading of the coronavirus across Europe has changed the economic outlook for the euro area dramatically. While it is clearly too early for an accurate assessment of the overall “ damage ” , there can be little doubt that growth will slow significantly in the coming months. The high degree of uncertainty regarding the outlook , and the unique challenge the virus represent s , leads to many, difficult to answer, questions for the ECB . Despite this uncertainty , we think that the ECB’s will feel in the end compelled to respond with yet another package of measures at its policy meeting next week - not least to signal its readiness to address any tightening of financial conditions before it becomes “entrenched”. More specifically we expect a 10bp cut in the deposit rate, an increase of the purchase program to €40 billion per month , and a new targeted funding operation for banks. This is clearly the first real test for Mrs Lagarde. It will also be a first clear indication to what extent the post-Draghi ECB is following a different playbook. Put differently, it may be that the ECB will show more inertia in its policy decision than we are used to and is embedded in our forecast .