ECB’s Schnabel: Current Lockdown Less Harmful to Economy Than First One

3 November 2020

By David Barwick – FRANKFURT (EconoStream) – The economic fallout from the second wave of the pandemic shouldn’t be as severe as the first time around, European Central Bank Executive Board member Isabel Schnabel said Tuesday.

In an interview with German business daily Handelsblatt, a text of which the ECB made available, Schnabel was noncommittal on the subject of making flexibility a hallmark of other ECB asset purchase programmes, and left the door open to a renewed interest rate cut.

With respect to the impact of the lockdown on output, ‘the effects are likely to be less pronounced this time, because the lockdown is more targeted’, she said. ‘It is a hard blow to the services sector, but manufacturing is not being shut down and is benefiting from China’s strong recovery.’

The third quarter was ‘surprisingly good’, while the current quarter ‘will likely see a marked decline in growth’, she said.

Asked if the ECB’s pandemic emergency purchase programme (PEPP) would need to continue for as long as the pandemic depresses inflation, Schnabel said that once the crisis is over, the ECB would have to ‘fall back on our regular toolbox’ in pursuing price stability. ‘But we’re still a long way off from that’, she added.

Schnabel was careful to distinguish between what she called the ‘net purchase phase’ of the PEPP, when the ECB is accumulating assets on balance, and the reinvestment phase, when maturing securities are only replaced, maintaining the volume of the portfolio.

‘I can imagine that the long-term effects would be taken into account when determining the length of the reinvestment phase, for example’, she said.

As to applying the PEPP’s flexibility to other asset purchase programmes, Schnabel said merely that the Governing Council had not discussed this. In contrast, Executive Board member Yves Mersch in a speech on Monday had been more categorical, suggesting that the PEPP’s flexibility was necessarily unique and that the Asset Purchase Programmes (APP) ‘will also not inherit the features of the PEPP.’

Further cutting the ECB’s deposit facility rate, now at -0.5%, ‘would be possible without reaching the point at which it no longer works or even causes harm’, she said. The Council has made no decisions about this, however, she said.

Schnabel’s view aligns with that of Bundesbank President Jens Weidmann, who a month ago said that the Council considers the so-called reverse rate not to have been reached yet and that ‘[f]urther interest rate cuts are thus possible’.

In contrast, Chief Economist Philip Lane last month indicated a reluctance to take interest rates further into negative territory. The shock from the pandemic should be mainly temporary and the impact on output ‘mostly gone by 2022’, whereas ‘[a]ny interest rate cut typically lasts for a long time’ because the entire yield curve shifts in response, he argued.

However, while favouring asset purchases as more effective, Lane too left the possibility of a conventional move on the table: ‘The value of a rate cut is still there and we look at it all the time,’ he said. ‘It’s perpetually looked at. We reject the idea that we are at the lower bound. ‘

In other comments, Schnabel professed concern about a tightening by banks of credit standards. ‘We are keeping a close eye on that’, she said. ‘The economic downturn must not be further exacerbated by the banking sector.’