ECB’s Lane: Still Mulling How to Ensure Favourable Financing Conditions

17 November 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank is still thinking about how to deliver in December what the euro area needs and support favourable financing conditions, Executive Board member Philip Lane said on Tuesday.

In an interview with Portuguese public broadcaster RTP3, a transcript of which the ECB made available, Lane appeared reluctant to buy into the idea that the new round of public health measures would inflict sustained damage on the Eurozone economy and predicted a return to normal life by late next year or early the following year, even if the economic recovery would still be incomplete at that time.

With respect to what the ECB would do in December, Lane was only willing to say that ‘what Europe needs in this period is for the ECB to underpin favourable financing conditions.’ As for the preferred approach, ‘we will think about deciding what is needed to deliver that’, he said.

The details of how the ECB delivers are ‘interesting and technically important from a central bank point of view’, he said, ‘but from the point of view of the real economy, the bigger or the most important message to get across is our intention is to ensure favourable financing conditions.’

He declined to engage in speculation about an expansion of the ECB’s pandemic emergency purchase programme (PEPP), affirming that ‘it's not so much the overall number that matters’, as this can always be adjusted to deliver the financing conditions that do matter.

Asked whether the new containment measures were a threat to ECB staff macroeconomic forecasts, due to be updated next month, Lane said that ‘it’s important to take into account that the middle of this year, the summer and early autumn were stronger than we expected.’

‘So yes, it looks like the last weeks of this year are going to be worse than expected, but when you average all of that out in terms of the overall 2020 performance, let's see if it makes a big difference to our current projections’, he said. ‘I think it's a bit early to tell.’

‘… there will be for sure some kind of adjustment for this final quarter, but when you add it all up for the performance in 2020, let's see’, he added.

As for next year, Lane was non-committal, reminding of the possibility of ongoing containment efforts as well as of the anticipated roll-out of vaccines. While the fourth quarter would thus ‘look worse than we might have expected’, he said, the projected ‘cumulative net impact’ beyond that remains to be seen.

The ECB’s baseline scenario ‘has been reinforced, I think, by the good news about the initial indicators from the vaccine result’, Lane said. Although the ECB still takes the view ‘that all of next year there will be interruptions to normal life, but by the end of next year, early 2022, I think there should be a return to normalisation.’

The recovery will remain incomplete, however, until late 2022, he added. ‘So it's that kind of timeline, a year to 18 months, which is at one level still a significant period, but we also can see the light at the end of the tunnel’, he said. Nor is it the case, he said, ‘that this pandemic should permanently damage the economic capacity of Europe or Portugal.’

Asked about banks, Lane doubled down on the idea that 18 months were on another level not such a significant period: ‘And it's also the case when we think that there's only another year or year-and-a-half in terms of recovery to go, the challenges for the banking system are much less now compared to the trauma that so many European countries faced in the last crisis.’

Non-performing loans are ‘not the core of the economic problem’, he said. Although ‘there will be some degree’ of NPLs owing to the current crisis, he said, ‘the fact that so many countries now have a lot of experience in handling non-performing loans does mean that there is more of a recipe, more of a playbook, more experience now in how to address this.’

With respect to public finances as well, Lane sounded sanguine. ‘A short period of large deficits is something I think that can be understood and can be seen as a very correct and natural response to the pandemic emergency’, he said.

An ‘open-ended fiscal problem’ would be another matter, he said. ‘On this occasion, when the European economy recovers next year or the year after, then a lot of tax revenue will recover and a lot of the temporary support schemes that are in place now will naturally expire.’

If the higher public debt is seen ‘in the context of very low interest rates, in the context of the macroeconomic environment, the assessment should be that this is something that is sustainable’, he added.

In other comments, Lane indicated that the ECB’s inflation objective would emerge from the strategy review without profound change. ‘The range of options there remains fairly narrow’, he said. ‘So I think there's not going to be any big revolution in that topic.’

Asset purchases, he seemed to suggest, would become a standard part of the central bank’s arsenal of instruments. Asked if this would be the case, he noted that ‘virtually all central banks’ are engaging in quantitative easing. ‘So yes, that is the trend in central banking and of course, as you know, we have a strategy review right now which will continue into next year’, he said.