ECB’s Mersch: Unanimity at Council Meet Was Regarding High Uncertainty

4 November 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Executive Board member Yves Mersch said last Friday that the unanimity at the previous day’s Governing Council meeting concerned the high degree of uncertainty prevailing. During the Q&A of an online UBS event, Mersch, according to a text not made available by the ECB until today, suggested that the ECB had held fire on October 29 because it needed to see what public health measures were taken to counter the second wave of the pandemic, the economic impact of these and the additional fiscal support deployed. ‘There was unanimity insofar as everyone agreed that we are facing high uncertainty’, he said. Council members were ‘quite confident’ that the full array of public policy measures ‘were showing strong effects’, he said, so that 3Q growth in Europe might even be double-digit. ‘However, looking forward, the situation has suddenly taken a turn for the worse’, he said. A resurgence of the pandemic was in the ECB’s central scenario, ‘but what is new is the extent of the deterioration’, he said. On the other hand, he continued, lockdowns now are not as they were during the first wave. ‘And therefore, before we can see what the economic consequences of this second wave are, we need to take into account the scope of the shutdowns that are being engineered in the different countries’, he said. In addition, the Governing Council has to see what further fiscal support is forthcoming, he said. Mersch indicated that monetary authorities’ uncertainty about ‘the direction and the consequences of this second wave’ had left them unable ‘to properly design and engineer a monetary policy response’ sooner. ‘But we signaled that we are ready to to look at our toolbox, to recalibrate or to rectify or to adjust – whatever term you want to use – all our instruments in order to take into account the new situation’, he said. ‘And we are all in agreement that in the new situation we need to recalibrate what we have been doing, and recalibration also means assessing the efficiency of the instruments in the new circumstances.’ Mersch returned to the ECB’s need to consider the fiscal policy reaction, noting that it was not the central bank’s job to provide credit at the level of individual companies. At another point in the Q&A, he affirmed that ‘for the moment, fiscal policy seems most appropriate because of the issues on the demand side, of consumers being affected … especially also if there is an increase in unemployment.’ Asked about the possibility of new monetary policy instruments, he demurred, mentioning only those already existing and the need to ‘see to what extent each of these instruments are considered to be efficient, and especially marginally efficient, because some of these instruments have been there for a prolonged time.’ There needs to be a discussion about ‘whether their marginal efficiency may be waning over time’, he said. Possible side effects would be another topic for discussion, he said, and the legal soundness of measures would need to be ensured. ‘This work will be done in the coming weeks, also on the basis of the fiscal response in the different member states’, he added. Mersch urged that, as ‘another element’, the decisions of the European Council be implemented rapidly. ‘We cannot be losing time now’, he said. Confirming that interest rate changes remained an option, he nevertheless appeared doubtful that this would be used, citing the potential for unintended consequences and efficiency considerations. As negative rates ‘would have to be extended to the retail sector’, he said, ‘[t]his would obviously be a very uphill struggle in terms of defending the reputation and confidence with European citizens.’ ‘All this has to be factored into our discussion’, he said. ‘So nothing is ruled out, but nothing is a given.’ Whether a decision to increase asset purchases would be implemented under the pandemic emergency purchase programme (PEPP) or another asset purchase programme ‘will without any doubt be part of our discussions’, Mersch said. But the question of what is appropriate also depends to a degree on additional fiscal support and the ‘time axis’, he said. The longer-than-anticipated duration of the pandemic ‘obviously would then have to be reflected in the timeline of the instruments’, he said. One option would be extending the life of some of the instruments, while the other is increasing pace and scope, he said. Also possible are ‘tweaks’ to ‘make the instruments more surgical and more targeted.’ ‘So all of our instruments will be under examination’, he said. ‘Rather than a step-by-step approach, we decided to have a comprehensive answer at our next monetary policy meeting.’ The discussion of efficiency will also take into account that given the ‘huge amount’ of new sovereign debt to be issued, he said, leaving the volume of an asset purchase programme untouched ‘would mean that in relative terms it might diminish compared to the overall economy.’ As well, the various asset purchase programmes’ differing regimes in terms of flexibility would be part of the discussion, he said. Asked whether the ECB might raise its 33% issue limit on asset purchases, Mersch characterised this constraint as an example of the ECB’s respect for the constitutional limits of the Treaty, noting also that the central bank also preferred to avoid involvement in the case of a debt restructuring. In other comments, Mersch said that even if banks were to become more reluctant to finance the economy, the ECB would ‘not force the banks to wilfully deteriorate their balance sheets.’