European Central Bank (ECB) President Christine Lagarde confirmed that the ECB would maintain its very accommodative monetary policy stance. The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) and expects purchases to be conducted at a significantly higher pace than during the first months of the year.
Lagarde said that the eurozone still had a long way to go before phasing out of monetary easing. She compared the situation to an economy on crutches, that has to cross the bridge of the pandemic, and in the meantime it needs two crutches, one fiscal and one monetary.
On national fiscal policies, Lagarde said an “ambitious and co-ordinated” approach remained crucial as a premature withdrawal of support would delay recovery and amplify long term scarring effects. She said firms and households would need ongoing support.
At a European level, she said the ECB Governing Council reiterated the need for a timely ratification of the own resources decision, to finalize recovery and resilience plans promptly and the need for the NextGenerationEU programme to become operational without delay. She said that this could contribute a faster, stronger and more uniform recovery and thereby add to the effectiveness of monetary policy in the eurozone.
ECB must remain eurozone's stabilizer: chief economist Lane
The European Central Bank must remain a key stabilizer of the euro zone economy as the bloc is at risk of suffering longer-term damage from its pandemic-induced double-dip recession, ECB chief economist Philip Lane (pictured) said on Saturday (27 March), writes Balazs Koranyi.
A sustained period of low activity reduces labour productivity, weakens corporate balance sheets and saps confidence, leading to a potential downward spiral, Lane said in a speech to the Spring workshop of The European House - Ambrosetti.
“There is a clear risk of self-fulfilling adverse dynamics taking hold, through which uncertain economic prospects induce households, firms and governments to hold back on expenditure plans, leading to a decline in overall demand that validates the loss in confidence about the future,” he said.
Hoping to prop up the economy until it is ready to reopen, the ECB has pushed borrowing costs to record lows through copious asset purchases and loans to banks at rates as low as minus 1%.
“To counter these risk factors, it is essential that the ECB acts as a stabilising force and boosts confidence by committing to the preservation of favourable financing conditions,” Lane, a chief architect of the ECB’s crisis response, said.
Let's talk about bonds: Five questions for the ECB
The European Central Bank meets on Thursday (11 March) and one topic will dominate: what to do about rising sovereign bond yields which if left unchecked could derail efforts to get a coronavirus-hit economy back on track, write Dhara Ranasinghe and Ritvik Carvalho.
Germany’s 10-year borrowing costs jumped 26 basis points in February, the biggest monthly rise in over three years, with similar moves seen across the euro area.
Policymakers from president Christine Lagarde to chief economist Philip Lane have expressed unease. Markets want to know the game plan.
Here are five key questions on the radar.
1. What will the ECB do to contain rising bond yields?
The ECB shouldn’t hesitate to lift bond buying volumes and use the full firepower of the 1.85 trillion euro ($2.2 trillion) Pandemic Emergency Purchase Programme (PEPP) if needed, says board member Fabio Panetta.
Economists agree but policymakers are divided. Just under 1 trillion euros of the PEPP is still unused. Buying slowed recently, perhaps due to technical factors.
Still higher government borrowing costs, threatening to spill over to corporates and consumers, create a headache for an ECB grappling with a weak economy.
“Is the ECB fully aware of the risks?,” said ING Research global head of macro Carsten Brzeski. “And if they are, are they willing to be more precise about what they are prepared to do -- will they act with advanced PEPP purchases?”
GRAPHIC: The ECB's pandemic stimulus programme
2) What exactly is the ECB watching to assess financial conditions?
Lagarde will be pressed for clarity on this.
She has voiced concern about rising nominal yields. Remarks from other officials and the last ECB minutes put emphasis on the real or inflation-adjusted component of yields as a key determinant of financial conditions.
Both have risen this year, but real yields less so.
Lane focuses on the GDP-weighted sovereign yield curve and the overnight index swap (OIS) curve.
A clearer idea of which is key would give markets a better sense of policymakers’ pain threshold.
GRAPHIC: Which yield is key?
3) How far does the ECB expect inflation to rise this year?
Accelerating inflation, which could exceed the near 2% target in coming months, means the ECB will likely increase its 2021 inflation forecast.
Lagarde may stress that a recent pick-up in prices is driven by one-off factors and should fall back.
But there are differing opinions among policymakers. Bundesbank chief Jens Weidmann believes the ECB will have to “act accordingly” if inflation rises.
“There are more mixed views on inflation - ECB staff and Lane think inflation is subdued but this is not shared by the hawks, with Weidmann recently highlighting that German inflation was likely to go through 3% this year,” said Jacob Nell, head of European economics at Morgan Stanley.
GRAPHIC: Accelerating inflation?
4) What will the ECB say about the economic outlook?
Economists expect the medium-term outlook to remain broadly unchanged, with a recovery forecast in the second half of 2021.
Lagarde, however, may stress short-term downside risks as the bloc battles the coronavirus pandemic and lockdowns.
The economy is almost certainly in a double-dip recession as the services industry suffers, but hopes for a wider vaccine rollout has driven optimism to a three-year peak, a survey showed last week.
GRAPHIC: Eurozone economic surprises stay positive in 2021
5) Is the ECB relieved that Draghi is Italian PM?
Lagarde is unlikely to comment on politics in Italy, where her predecessor Mario Draghi just became prime minister. But a fall in Italian borrowing costs on his appointment is good news and eases pressure on the ECB.
The Italian/German 10-year bond yield gap narrowed to the tightest levels since 2015 in February; recent bond turbulence hasn’t hurt too much.
The trusted Draghi has promised sweeping reforms to revitalise a battered economy. His strongly pro-European stance is seen as a positive for Italy and the euro project.
GRAPHIC: Italian bond spread during the COVID-19 crisis
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The new structure will be reviewed after three years, as the aim is to ultimately incorporate climate considerations into the routine business of the ECB.
- The five work streams of the climate change centre focus on: 1) financial stability and prudential policy; 2) macroeconomic analysis and monetary policy; 3) financial market operations and risk; 4) EU policy and financial regulation; and 5) corporate sustainability.
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