By David Barwick – FRANKFURT (EconoStream) – The monetary policy decisions taken Thursday by the European Central Bank were motivated by risks to price stability and the fragility of financial markets, according to ECB Executive Board member Philip Lane on Friday.

In a blog post on the ECB’s website, Lane, who is also Chief Economist of the ECB, said that the central bank would base future decisions on incoming data, including its staff macroeconomic projections, and was prepared to take further action as warranted.

‘Two factors called for further policy action yesterday”, he said. ‘First, without a sufficient policy response, the pandemic-related negative shock to the inflation path poses a threat to medium-term price stability.’

Euro area financial conditions are much tighter than prior to the pandemic, which runs counter to what deteriorated economic and inflation prospects warrant, he said.

Secondly, ‘the situation remains fragile’ in financial markets, he said, giving the ECB a continued stabilization role to play.

The stock-up by €600bn of the Pandemic Emergency Purchase Programme (PEPP), leaving its total volume at €1,350bn, addresses both sets of concerns, he said.

Lane noted that the ECB had also decided to reinvest maturing principal payments from securities purchased under the PEPP until at least the end of 2022 as well as to manage the future roll-off of the PEPP portfolio in such a way as to avoid interference with the appropriate monetary policy stance

The PEPP reinvestment strategy mitigates the possibility that financial conditions could tighten before the economy has recovered fully, while allowing monetary policy to be conducted in line with prevailing circumstances, he said.

Economic and financial data ahead, along with updated staff macroeconomic forecasts, would ‘provide essential guidance as to whether the pandemic-related negative shock to inflation dynamics has been sufficiently contained’, he said.

Successful management of the economic fallout from the pandemic would allow monetary policy to focus anew on its medium-term price stability ambition, he said.

‘Accordingly, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner’, he said.