ECB’s Lane: ECB Analysing the Situation; June Meet Still 3 Weeks Off

18 May, 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank is in the process of evaluating the situation with respect to its policy stance and the potential need to do more at the meeting to take place in June, ECB Executive Board member Philip Lane on Monday.

In an interview with Spanish daily El Pais, Lane, who is also Chief Economist of the ECB, reminded that the ECB stands ready to adjust its instruments as needed, according to a text of the interview provided by the ECB.

The ECB is helping with its recent measures to set the monetary and financial stage for a return to economic growth and in this sense “has done a lot already”, he said. “And we are continuously monitoring the situation and are ready to adjust all our instruments if necessary.”

As to expectations that the ECB would stock up its €750-billion Pandemic Emergency Purchase Programme (PEPP) at the June 4 monetary policy meeting, Lane noted that there remained three weeks until then and said that ECB was “in the process of analysing the situation”.

The ECB can adjust the PEPP in size or duration if it deems financial conditions warrant it or individual bond markets are failing to reflect economic fundamentals, he said.

“Our aim is to ensure that financial conditions are appropriate for all markets and to help counter rather than amplify the impact of the pandemic shock on the economy,” he said.

The May 5 decision by Germany’s Constitutional Court declaring partly unconstitutional ECB bond purchases made during the euro crisis under the Public Sector Purchase Programme (PSPP) did not limit the ECB’s ability to act, Lane said.

The ECB is “careful to remain at a good distance” from monetary financing, in line with the Treaty’s prohibition of this, “and this has also been confirmed by the court rulings”, he said.

The ECB is not trying to eliminate interest rate spreads that reflect fundamental economic differences between member states, he said. In March, however, the rapid widening of spreads was not due to fundamentals, he continued.

“When there is market turmoil and spreads widen rapidly due to market dislocation, the central bank has to act as a stabilising factor for the markets,” he said, especially under monetary union. “The stabilising presence of the central banks can then rule out self-fulfilling flight-to-safety dynamics and illiquidity in individual sovereign bond markets, and this is what we pledged to do.”

According to Lane, the pace of an economic recovery would depend on the readiness of consumers and businesses to spend and invest. “From today’s perspective, it looks in any case unlikely that economic activity will return to its pre-crisis level before 2021, if not later,” he said.

Given the high uncertainty about the nature of the recovery, all that can be said for sure is that the first half of the year will see the steepest downturn before a gradual upturn sets in, he said.