European Central Bank – more questions than answers

The Governing Council of the European Central Bank (ECB) met yesterday to decide on further easing of conditions for refinancing. It did not decide to ramp up bond purchases, but reiterated that it is fully prepared to increase the size of the Pandemic Emergency Purchase Programme (PEPP) and adjust its composition, by as much as necessary and for as long as needed. During the press conference yesterday, the President of the ECB, Christine Lagarde, argued that the tools used are more suitable in the current situation than the outright Monetary Transactions (OMT). Also, the Governing Council did not discuss changes to the asset purchase programme (APP) eligibility framework to buy junk bonds, though a waiver of eligibility requirements for securities issued by Greece was been given. Moreover, the idea of a “blanket ESM programme” was off the table. Responding to a question on whether the ECB should adopt formal yield control policies, Christine Lagarde argued that the combination of tools used enables the ECB to operate across the entire curve and to actually deal with all maturities.

Reporting yesterday on the outcome of the meeting of the Governing Council, Christine Lagarde welcomed the measures taken by the euro area governments and the European institutions to ensure sufficient healthcare resources and to provide support to affected companies, workers and households. She added that “at the same time, continued and ambitious efforts are needed notably through joint and coordinated policy actions to guard against downside risks and to underpin the recovery”.

“The decisive and targeted policy measures that the ECB has taken since early March have provided crucial support to the euro area economy and especially to the sectors most exposed to the crisis”, according to Christine Lagarde who Christine underscored that the ECB is determined to continue to support households and firms in the face of the current economic disruption and heighten uncertainty in order to safeguard medium-term price stability according to the ECB’s mandate.

The ECB wants the inflation outlook to robustly converge to a level sufficiently to but below 2% within our projection horizon and such convergence has been consistently reflected in underlying inflation dynamics. Yesterday, it took measure to recalibrate targeted lending operations to further support real economy. It decided to keep the interest rate on the main refinancing operations (MROs) and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively. But, targeted longer-term refinancing operations (TLTROs) will benefit from considerably more favourable terms during the period from June 2020 to June 2021, including a reduction in interest rates.

The ECB has a firepower of more than €1 trillion – asset purchases and a generous lending plan -, as well as a set of tools, to keep companies and households afloat during an historic slump. The ECB is determined to deploy these tools with full flexibility over time, across asset classes and among jurisdictions. Addressing concerns of countries who feel they are not getting sufficient support from ECB, Christine Lagarde said “We will not tolerate any risks of fragmentation” in the euro area financial markets. She added that “We will make share that our monetary stance and our monetary policy transmission are both effective”.

As expected, the ECB decided yesterday to further ease the conditions on targeted long-term refinancing operations, notably reducing interest rates and launching a new series of additional non-targeted pandemic emergency longer-term refinancing operations (PELTROs). Since the end of March, ECB has been conducting purchase under the €750 billion PEPP. Net purchases under the APP will continue at a monthly pace of €20 billion together with the purchases under the temporary envelope of additional net asset purchases of €120 billion. The ECB will also continue reinvesting in full the principal payments from maturing securities purchased under the APP.

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