ECB’s Schnabel: Need to Assess Duration of New Health Measures’ Impact

4 November 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s actions in December will benefit from updated staff forecasts that let the Governing Council assess the possible duration of the latest containment measures’ economic impact, Executive Board member Isabel Schnabel said Wednesday.

In a speech at the second EBI Policy Conference, a text of which the ECB made available, Schnabel said economic risks were tilted downward due to the second wave of the pandemic, but only mentioned the fourth quarter in this context.

Quoting the last introductory statement from October 29, Schnabel said the ECB would ‘recalibrate its instruments, as appropriate’, keeping financing conditions favourable and countering a deterioration of projected inflation.

‘Our deliberations will be informed by the December staff projections, which will offer a first tentative assessment of how persistent the economic effects of the new containment measures are likely to be, also taking into account the potential approval and distribution of a vaccine and the ensuing fiscal response’, she said.

‘They will also include a thorough assessment of how monetary policy can best contribute to the economic recovery in the current environment that differs from the challenges we were facing in spring’, she added.

‘Most notably’, she said, the current containment measures’ financial market impact has been ‘much more localised’, with markets working smoothly and ‘no signs of fragmentation’.

‘Quite on the contrary,’ she continued, regional sovereign debt markets reflect the ECB’s accommodative stance, with the GDP-weighted sovereign yield curve well under the level prior to the pandemic. Not one Eurozone member state is failing to benefit from negative yields, for the most part out to a maturity of three years, she noted.

This financial market resilience is closely linked to the monetary and fiscal policy reactions and not to be taken for granted, she said: ‘Investors have rather internalised that monetary policy will remain a stable and reliable source of support throughout the crisis.’

The resurgence of the pandemic has ‘visibly skewed’ 4Q economic risks to the downside and necessitated containment measures that will weaken the recovery, potentially cause labour market scarring and require additional fiscal support, she said.

The most recent data show the recovery to have suffered an ‘inversion’, she said, pointing to the third consecutive decline in the composite PMI last month.