ECB’s Lane: Wouldn’t End PEPP Before Pandemic Leaves Economy Alone

23 November 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank would not terminate its pandemic emergency purchase programme (PEPP) while the pandemic continues to disrupt normal economic activity, Executive Board member Philip Lane said on Sunday.

In an interview with French financial daily Les Echos, a transcript of which the ECB made available, Lane, who is also chief economist, said that the public health measures in response to the second wave of Covid-19 would not be the final round.

Eurozone GDP would not regain pre-pandemic levels before the autumn of 2022, he said. Even with a vaccine, presumed to become available throughout 2021, ‘there will be some persistent damage and the European economy will not exit this crisis without being weakened over a long period of time’, he said.

The current pandemic containment measures ‘will certainly not be the last’, he said. Market euphoria about a potential vaccine reflects expectations of earnings in 2022 and beyond, he affirmed.

Still, he said, the prospect of a vaccine ‘is broadly confirming that we were on the right track’ when the ECB issued its multi-year baseline scenario in May. ‘The most severe scenarios are less likely now, but there remains a big gap between now and the end’, he said.

As for the end date of the PEPP, Lane suggested that this would be some time in coming, reminding that ‘[i]t takes time for monetary policy to filter through to the economy.’ And in any case, he said, ‘further interruptions of economic activity would clearly suggest that it would be too early to terminate the PEPP.’

Although ‘certain conditions’ would need to be satisfied before the PEPP can be terminated, these are not even yet fully defined, he indicated. In addition to the condition that the pandemic no longer interfere with economic activity, the ECB ‘will also have to establish other conditions in terms of economic recovery and inflation dynamics, but it’s still too early to do this’, he said.

In general, he said, the ECB would continue buying assets under the asset purchase programme ‘until we are in a position to raise interest rates, which will require inflation to be back in the neighbourhood of our aim.’

At such a time, the ECB would initially only ‘stop adding to the stock of debt’, he said. ‘Then after that point, at some point, there could be a discussion about shrinking the balance sheet.’

The last staff macroeconomic projections, due to be updated next month, showed inflation falling short of the ECB’s objective over the medium term, he reminded in this context.

As for the deposit rate facility, the current -0.5% level is not the lower bound; ‘we do think there is room for further cuts in the future’, he said. However, the ECB needs to choose the tools that would work best now, he said, and has made clear that the PEPP and targeted longer-term refinancing operations (TLTROs) ‘have been very effective.’

The ECB takes ‘very seriously’ survey indicators of tightening financial conditions, he said, and between now and December 10 ‘will look at a possible redesign, continuation or extension’ of its targeted lending. It isn’t just a matter of the interest rate when it comes to the TLTROs, but also of how much lending banks have to engage in to be eligible for participation and the duration, he said.

Lane played down the exchange rate, affirming merely that while it matters for inflation, ‘[i]t feeds in with lots of other things that can have an impact on prices.’ The ECB reacts when it sees price stability endangered and does not target the exchange rate, he said.

People’s fear of Covid-19 and the measures to contain the spread of the virus will ‘absolutely’ impact economic activity, but the extent is uncertain, he said. The impact will probably be less than that of the spring, but sudden changes in the situation are possible, he said. Most likely in any case ‘is that the situation will not materially improve in the last weeks of 2020.’

Lane, asked whether the ECB should now be expected to take steps based on European sovereign bond yields, responded that monetary authorities ‘don’t look at just one sovereign yield indicator. It is important to avoid euro area fragmentation.’

While the ECB’s role in the pandemic is to ensure favourable financing conditions, he said, this also includes the credit conditions faced by SMEs, corporates and households.

The PEPP’s flexibility constitutes an important reassurance that the ECB can ensure stable markets, he said. The capital key should be the ‘natural guide’ when conducting purchases, ‘[b]ut under conditions of market stress it also makes a lot of sense to not impose restrictions on ourselves that would basically damage the efficiency of monetary policy’, he said.

Although it is still too soon to say what outcome the ECB’s ongoing strategy review will yield, he said, he noted that the introductory statement read by the president following monetary policy meetings of the Governing Council has made explicit reference to the ECB’s symmetric approach since mid-2019.