ECB’s Schnabel: Situation Not Yet Stable; We Must Act Forcefully

27 May 2020

By David Barwick – FRANKFURT (EconoStream) – The euro area remains in an unstable situation, implying that the European Central Bank must continue to act forcefully, ECB Executive Board member Isabel Schnabel said Wednesday.

The ECB is watching spreads carefully and would move to counter any unjustified tightening of financial conditions that threatens price stability, she said.

The central bank will pay close attention to prospects for medium-term inflation at its June 4 monetary policy meeting.

In separate interviews conducted Monday with the Financial Times and the German economic policy journal Perspektiven der Wirtschaftspolitik, Schnabel also said that it appeared probable that the economy would return to steady growth next year.

Though not targeting spreads, these are closely monitored, and were the ECB to see a rapid widening of spreads indicating fragmentation, “we have to react”, she said. “If we see that there is an unwarranted tightening of financial conditions that is not consistent with our price stability objective, the ECB will react.”

The GDP-weighted euro area yield curve shifted up “quite dramatically” early in the crisis and, like other indicators the ECB considers, has not returned it to its level of before the crisis, she said: “This shows that we are still not in a stable situation and that we have to continue to act forcefully.”

Asked whether the ECB’s €750bn Pandemic Emergency Purchase Programme (PEPP) would be exhausted by October, Schnabel referred to next week’s meeting of the Governing Council, at which staff macroeconomic forecasts would be revised.

“We are going to look at the numbers very carefully,” she said. “One number that is of course of particular interest is the evolution of the medium-term inflation outlook. If we see that the situation has deteriorated, and if we judge that further stimulus is needed, the ECB will be ready to expand any of its tools in order to achieve its price stability objective.”

The PEPP’s volume, composition across asset classes and duration can all be adjusted, she reminded. “We are ready to react to new data coming in,” she said.

The outlook for inflation in the medium term is subject to great uncertainty, being subject to competing forces like reduced consumption and investment on the one hand and de-globalisation or supply-side disruptions on the other, she said.

Schnabel denied that the ECB’s crisis measures, including the PEPP, had been motivated by concerns regarding Italy, noting that monetary policy is set with the entirety of the area in mind. “PEPP calmed the markets and contained fragmentation in the euro area,” she affirmed.

The actual duration of the ECB’s various temporary measures “could turn out to be quite long”, she said. “But we have to be clear that what matters right now is getting over the crisis and ensuring that the euro area doesn’t fall into a depression lasting many years, but that we get back on a path of steady growth next year and make up at least some of the losses suffered. That certainly looks likely at the moment.”