ECB’s Lane: Ready to Adjust Deposit Facility Rate if Necessary

11 June 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank is prepared to adjust its key policy rate or any other of its instruments if circumstances warrant, ECB Executive Board member Philip Lane said Thursday.

In an interview with Italian national business daily Il Sole 24 Ore, Lane, who is also Chief Economist of the ECB, said that financial markets had grown more optimistic about the economic outlook in Europe, according to a text of the interview provided by the ECB.

Asked whether the possibility for banks to obtain funding via the ECB’s targeted lending programme at a rate as low as -1% meant that an interest rate cut was out of the question, Lane replied, ‘When it comes to our policy rate, we are ready to adjust it if necessary, as is true for all our instruments.’

The attractive conditions of the ECB’s targeted longer-term refinancing operations [TLTRO] III reflect the ECB’s determination ‘to make sure that this crisis is not made worse by an avoidable credit crunch.’

Under the present circumstances of high uncertainty and ongoing financial market tension, asset purchases were a ‘particularly effective’ element of the ECB’s toolkit and thus the focus of the ECB’s latest policy decision.

Recent weeks have brought a ‘restoration of investor confidence in the European economy’, Lane said. In view of all the policy measures, global observers take a more positive view of the European response to the crisis, he said, ‘[s]o one thing we see in financial markets is more optimism about the prospects of the euro area economy.’

Lane nonetheless observed that financial conditions are tighter, pointing to the decline in equity markets and higher sovereign yields. Lest this tightening affect the availability of credit to companies and households, the ECB added €600 billion to its pandemic emergency purchase programme (PEPP), he explained.

‘In the initial phase of the PEPP, market stabilisation was particularly important’, he said. ‘Now, we want to make sure that stability stays but also that financial conditions are sufficiently accommodative to support the economic recovery and counter the substantial negative shock to the inflation trajectory.’

Lane warned that the ECB’s current reinvestment of maturing principal payments from its asset purchases would not continue indefinitely and in the long run indirectly enable the debt monetisation prohibited by the Treaty.

‘…our central bank actions are motivated by our monetary policy mandate: if the inflation outlook changes, then central bank policies will adjust as well’, he said.