Recent data showed the Eurozone economy performed above expectations during the second quarter. Analysts at Wells Fargo explained data the latest report showed the positive momentum continued at the beginning of the third quarter. Still, they expect the European Central Bank (ECB) to maintain its accommodative monetary policy and, indeed, ease policy further in December by announcing a further increase in its bond purchase program.

Key Quotes: 

“Eurozone Q2 GDP grew a stronger-than-expected 2.0% quarter-over-quarter, with particularly strong gains reported for Italy and Spain. July inflation remained contained overall, as the headline CPI quickened only slightly to 2.2% year-over-year.”

“The ECB will certainly welcome the improvement in growth, while the moderate inflation trends means there is no need for the central bank to move to less accommodative monetary policy any time soon. That is reinforced by recent changes by the ECB to its policy strategy that included a shift to a symmetric 2% inflation target, and the dovish policy guidance from the ECB following its July monetary policy meeting. Indeed, given the latest COVID developments have added some element of near-term uncertainty, we now expect the ECB to refrain from tapering its bond purchases in September, and instead signal that Q4 buying for the Pandemic Emergency Purchase Program (PEPP) will continue to be conducted at a significantly higher pace than during the early months of this year.”

“If recent COVID developments do eventually have some influence on confidence and activity, and more importantly should underlying inflation trends fail to move meaningfully higher, we expect the ECB to announce a further increase in bond purchases. Our base case for the European Central Bank’s December monetary policy announcement is for the central bank to announce a further €500 billion increase in PEPP purchases, taking the size of that program to €2.350 trillion, with purchases under the PEPP program to continue until at least September 2022.”