ECB’s Schnabel: This Crisis Isn’t Over; We Can’t Lay Back and Relax

25 May 2020

By David Barwick – FRANKFURT (EconoStream) – While the European Central Bank’s measures to counter the economic fallout from the pandemic have worked well, one mustn’t lose sight of the fact that the crisis is ongoing and that it is thus not yet appropriate to relax, according to ECB Executive Board member Isabel Schnabel.

In a podcast recorded on May 15 and published Monday on the ECB’s website, Schnabel explained that rapidly widening spreads generally justify central bank intervention.

Asked to assess the results so far of ECB policy decisions taken since the outbreak, Schnabel replied, “I think it’s fair to say that our measures were very effective in calming the situation. But we also have to be aware of the fact that we are not back to the situation where we were before the crisis.”

Spreads and interest rates on corporate bonds remain elevated, and stock prices, especially in the banking sector, are still depressed, she elaborated.

“And so it’s clear that we have not gone back to a normal situation,” she said. “So, the financial market data shows it very clearly that we are still in a crisis, so we cannot lay back and relax, but we have to be very aware of the fact that this crisis is not over.”

Describing the situation in March, Schnabel said that the rapid widening of spreads meant that financing conditions had tightened unevenly across the region and that fragmentation was thus endangering monetary policy transmission. Such developments, she made clear, must always concern monetary authorities, given that economic fundamentals change too gradually to drive rapid changes in spreads.

“What you see in such a situation is dynamics that are driven also by a kind of market panic, and this … can lead to dangerous spirals that then become self-reinforcing, and therefore when we see that spreads widen very rapidly, this is also a sign that markets are not working properly, and then that is a reason for us to intervene,” she said.

In the present case, the ECB’s “very forceful” response was the March 18 announcement of its €750-billion Pandemic Emergency Purchase Programme (PEPP), she said. She echoed her colleagues in emphasizing the PEPP’s built-in flexibility across time, asset classes and jurisdictions.

“So if we see that there is fragmentation going on, it may be necessary to buy a bit more of a certain sovereign bond and a bit less of another one,” she said.