ECB’s Schnabel: Progress on Vaccine Gets Us Back to Central Scenario

13 November 2020

By David Barwick – FRANKFURT (EconoStream) – The news regarding a medical solution to the pandemic does not fundamentally change the outlook but does represent a return to the European Central Bank’s baseline scenario, Executive Board member Isabel Schnabel said Friday.

In an interview with CNBC, Schnabel indicated that the recalibration of the ECB’s policy stance on December 10 would come down to the question of how asset purchases can be conducted so as to maintain current, historically easy financing conditions.

Recent progress towards a vaccine against Covid-19 is ‘excellent news’ but ‘not a game-changer’ since it ‘basically puts us back in our baseline scenario, because the baseline scenario that we formulated in the middle of the year foresees a vaccine being rolled out in 2021’, she said. ‘But it kind of leads to a slight improvement compared with how things were before that news.’

Asked about the likely outcome of the Governing Council’s December 10 monetary policy meeting, at which the ECB has vowed to recalibrate its stance, Schnabel stressed the significance of ECB President Christine Lagarde’s recent comment that not only the favourableness of financing conditions matters, but their duration as well.

‘The important message is that the ECB is going to be there for as long as necessary’, which in turn depends critically on the evolution of the pandemic and efforts to resolve it medically, she said. As policy measures ‘may be with us for quite some time’, side effects are an issue, she said.

‘Therefore, I think we also have to discuss the intensity of our asset purchases, which is also important’, she said. ‘So we have to ask: what is the intensity of purchases that is needed to preserve historically low financial conditions?’

Although flexibility remains an essential characteristic of the programme, she said, ‘we are now in a very different situation than in March, because financing conditions are extremely benign and we do not face any market turbulence.’ This, she said, is ‘why I think we cannot just do the same all over again, but we have to rethink what is the best and most efficient way to act in order to achieve our objectives.’

Monetary policy alone cannot achieve the ‘key’ objective of ensuring financing conditions stay as favourable as they now are, she said. Fiscal policy should continue to act complementarily, she urged, with neither one being removed too soon.

With regard to the ECB’s targeted longer-term refinancing operations (TLTROs), Schnabel said the incentive given participating banks to reach a certain level of lending was an essential principle. This principle ‘will have to play an important role in the new measures, so that there is an incentive for banks to continue lending, because we are a bit worried about that’, she said, citing some banks’ expectations of tightening credit standards.

Schnabel confirmed that cutting the deposit facility rate yet further from its current -0.5% remained an option, though she swiftly added that ‘there are reasons why we haven’t reduced interest rates in the past and now we have to check whether these reasons are still valid.’

One reason, which she called important, is the potential impact of such low rates on banks. The ECB’s tiering multiplier ‘has been quite successful’ in mitigating these effects, she said. In any case, she said, the ECB will always strike an optimal balance between the effectiveness of its measures and the unintended consequences.

The ‘good recovery’ being seen in China constitutes ‘good news that we are getting positive effects from the global side’, she said.