As if the ECB did not already have enough on its plate with the unprecedented Covid-19-related growth shock, which led to the announcement of additional asset purchases to the tune of EUR1,350bn, it will now need to decide how to deal with two additional headaches to its growing list of worries.

All signs point towards more easing, but we think that the ECB for now will choose to remain in a wait-and-see mode in the fall in order to gather more data and insights to allow for a better-informed and calibrated policy response to the prevailing challenges.

Once the ECB has more visibility around these crucial factors determining its policy response, we expect it to act decisively by year-end with a EUR500bn top-up to 2021 QE given the rising threat to its credibility.

The Fed’s recent announcement of a strategy shift towards an average inflation targeting regime implicitly concluded the ECB’s own strategy overhaul before it even kicked off – at least as far as the inflation target is concerned. This does not mean that the ECB will copy the Fed’s precedent to a T. But we think that the ECB will probably signal its readiness to also tolerate a temporary inflation overshoot by making its 2% price stability target symmetric. How to meet this slightly higher goalpost while keeping financial stability risks at bay remains anyone’s guess.