By David Barwick – FRANKFURT (EconoStream) – The European Central Bank must ensure that its policy wards off the escalation of tail risks from pro-cyclical mechanisms, ECB Executive Board member Philip Lane said Tuesday.

In remarks at the Institute for Monetary and Financial Stability Policy Webinar, Lane, who is also Chief Economist of the ECB, reiterated the ECB’s willingness to modify its €750-billion Pandemic Emergency Purchase Programme (PEPP), along with his assertion of last week that the Eurozone economy has reached a trough and will pick up in the summer months, according to a text of the speech provided by the ECB.

“We continue to monitor market developments closely,” he said. “In the context of the current extraordinary and severe macro-financial environment, we must ensure our monetary stance provides sufficient accommodation and guards against the escalation of tail risks associated with pro-cyclical financial amplification mechanisms.”

The ECB constantly reevaluates the appropriateness of its measures for the prevailing situation, he said. “Accordingly, we are fully prepared to further adjust our instruments if warranted,” he said. “This includes increasing the size of the PEPP and adjusting its composition, by as much as necessary and for as long as needed.”

Lane reviewed monetary policy’s key tasks at the moment, starting with the need for a sufficient monetary accommodation. In this context, the ECB’s negative deposit rate, flanked by assurances that rates would not rise before mid-term inflation was sustainably in line with price stability, anchored risk-free rates in the short to medium term, he said. The same effect is achieved in the longer term by the ECB’s asset purchases and its promise to continue reinvesting principal payments from maturing assets, he said.

The ECB’s second key task is ensuring smooth policy transmission, he continued. The March 18 announcement of the PEPP stopped the tightening of financial conditions that threatened to impede monetary policy transmission, he asserted. The PEPP’s flexibility market stabilisation function is enhanced by the ECB’s ability to deploy it flexibly with respect to the distribution of purchases between public and private securities, across time and between countries, he noted.

Finally, the uncertain environment makes it particularly important that banks have “access to central bank liquidity on generous terms and over long tenors,” he said. The ECB addresses this need via its longer-term refinancing operations, he said.

While the various economic scenarios shared by the ECB on May 1 are subject to updating in two weeks, the economy is seen bottoming out in all cases in a “deep recession” this quarter and then giving way to a “significant rebound” next, he said.

Meanwhile, household savings would remain high, he said, with the precautionary motive remaining “significant so long as virus-related uncertainty persists”. The latter may dampen investment “for an extended period of time”, he said.