ECB Meeting Account Shows Desire to Pre-empt Loss of Confidence

22 May 2020

By David Barwick – FRANKFURT (EconoStream) – The account of the European Central Bank’s meeting of 29-30 April, released by the ECB on Friday, showed members of the Governing Council to be keen on preserving financial market confidence, potentially by pre-emptive policy action.

At the meeting, which took place April 29-30, members expressed concern that pro-cyclical amplification effects would become more likely with the increasing duration of the crisis, and that the ECB needed to be prepared to take further measures and to keep the transmission mechanism intact.

According to the account, the recovery of stock prices had not been “grounded in improved fundamentals” and a risk that further declines in inflation would boost real interest rates was seen.

The Governing Council’s decisions in March and April had preserved the ECB’s accommodative policy stance and its transmission, but worry was expressed about “undue risks of fragmentation” re-emerging as the economy deteriorated further, the report said.

“It was underlined that past experience showed that a loss of confidence in financial markets had to be avoided and pre-emptive action was preferable,” it said. Council members noted that illiquidity on the part of companies or banks could amplify the economic downturn and pose deflationary risks, problems fiscal policy was called on to help address.

“Overall, it was felt that the longer the crisis endured, the more the risk of financial amplification effects would increase,” the account said.

In view of the uncertainty about the outlook, the Council “stressed that the ECB needed to stand ready to adjust its monetary policy stance as appropriate and also to ensure the functioning of transmission across the euro area,” according to the report. It was specified that this included safeguarding favourable financing conditions, warding off downside inflation risks and preventing fragmentation.

The March 18 announcement of the €750-billion Pandemic Emergency Purchase Programme (PEPP) was assessed as having been instrumental, notwithstanding the subsequent strengthening of sovereign bond yields. It was “widely agreed” that implementation of the PEPP should employ the programme’s flexibility to maintain a smooth policy transmission.

The risk of fiscal dominance was acknowledged but seen as “by no means a justification for the Governing Council not to fulfil its price stability mandate and support monetary policy transmission”, the report said. However, price stability would need to be “kept to the fore” to ensure the ECB acted within its mandate.

Council members agreed that communication would include the ECB’s readiness “to adjust all of its measures, as appropriate, to ensure that inflation moved towards its aim in a sustained manner. It was fully prepared to increase the size of the PEPP and adjust its composition, and potentially its other instruments, if, in the light of information that became available before its June meeting, it judged that the scale of the stimulus was falling short of what was needed.”