ECB’s Schnabel: No Reason to Alter Policy While Baseline Still Intact

31 August, 2020

By David Barwick – FRANKFURT (EconoStream) – As long as economic developments continue to support the European Central Bank’s main scenario, there is no basis for a modification of the ECB’s monetary policy stance, Executive Board member Isabel Schnabel said Monday.

In an interview with Reuters, Schnabel, according to a text provided by the ECB, said that incoming data were consistent with June staff macroeconomic forecasts and that the volume of the ECB’s pandemic emergency purchase programme (PEPP) seemed appropriate at its current level.

Asked whether the Governing Council would need to revisit its policy stance at the September 10 meeting, when updated forecasts would become available, Schnabel set the stage for a negative answer by noting the Council’s decision in June to expand the PEPP envelope by €600 billion on account of ‘a very subdued inflation outlook’ at the time.

‘Our policies are data-driven’, she continued. ‘As long as the baseline scenario remains intact, there is no reason to adjust the monetary policy stance. Of course, the projections will play an important role going forward. But at the moment the PEPP envelope looks appropriate.’

The 2Q euro area contraction of 12.1% on the quarter was ‘close to’ the -13% the ECB had been expecting, and recent data ‘by and large … support the baseline of our June projections’, making the baseline still ‘plausible’, she said. Despite the new wave of Covid-19 infections, another full lockdown was ‘unlikely’, she affirmed.

Schnabel confirmed that she was thus satisfied with both the state of ECB monetary policy and current staff projections for growth and inflation, though she urged awaiting the updates of the latter.

With regard to the discussion as to the need to exhaust the entire €1.350 trillion available under the PEPP, Schnabel asserted that the full envelope would be deployed under the baseline scenario as envisioned in June. While surprises of any kind could lead the ECB to revisit this, ‘at the moment, that’s not on the cards’, she said.

To the extent that purchases of sovereign debt made under the PEPP diverge from the key used to calculate national central banks’ respective share of the ECB’s capital, this is ‘driven by the need to counter the risk of fragmentation’, she said. The PEPP’s other function, namely returning inflation to its pre-pandemic path, entails ‘no need to deviate from the capital key’, she said.

Therefore, although the Governing Council has not discussed at what point these purchases would converge back to the capital key, a ‘rule of thumb’ would be that ‘[a]s the risk of fragmentation is going down, there is less of a need to deviate from the capital key’, she said.

Schnabel offered an upbeat assessment of the PEPP’s impact to date with respect to mitigating market stress, adding that fiscal policy had also contributed. ‘The initial tightening of financial conditions has largely reversed and the risk of fragmentation has come down quite a bit’, she said. ‘Spreads have come down substantially.’

The EU Commission will likely see to it that the debt to be issued jointly pursuant to EU leaders’ recovery fund agreement in July is eligible for purchase by the ECB, Schnabel signalled. Ten percent of expenditures made under the PEPP and the pre-existing public sector purchase programme (PSPP) can be allocated to supranational debt, she reminded.

Although issuance of EU debt may occur primarily after the PEPP has been phased out, market expectations would not be allowed to dictate an extension of the programme, she said: ‘We take the decisions, not the markets.’

The ECB’s tiering system, introduced to cushion the impact on banks of a negative deposit facility rate, could potentially be tinkered with yet, she indicated, in terms of both the multiplier – the factor by which a credit institution’s reserves exempt from negative remuneration exceed minimum requirements, currently equal to six for all institutions – as well how exempt reserves are remunerated.

‘But at the moment, we are looking at how the decisions that we’ve taken are working through the system’, she added. ‘So we have not yet discussed an adjustment in those parameters.’

Schnabel described the €1.31 trillion take-up at the first allotment of the third series of targeted longer-term refinancing operations (TLTRO III) in June as ‘historically high’. Future allotments will yield ‘nothing comparable’, she said, but the point is the existence of the facility. The TLTROs would not become a permanent policy feature, she added.

The recent appreciation of the euro can be seen positively, Schnabel suggested. The weakening of the U.S. dollar shows increased global confidence leading to a reversal of safe-haven flows, she argued. Moreover, the recovery fund agreement in Europe inspires trust in the euro, she said.

‘How all this translates into inflation is not entirely clear’, she continued, urging caution in making any interpretation. In any case, she added, ‘At the moment I am not worrying too much about exchange rate developments.’

Asked if the ECB’s definition of price stability would undergo change as a consequence of the strategic review, which she confirmed to be currently restarting, Schnabel said that the ECB was ‘also open to adjusting [it], but I cannot tell you how.’

The medium-term perspective has served well and thus ‘will be maintained’, she said. The even greater importance now of communication suggests the advisability of ‘a target that can be easily communicated.’

In other comments, Schnabel said that the economic fallout from the pandemic would have ‘long-lasting structural effects’ that exert ‘an important impact on our monetary policy.’ The possibility of a further decline in the natural real rate of interest ‘poses a challenge’ that monetary authorities ‘have to take … very seriously.’