ECB’s Rehn: Scarring Effects of Second Wave Likely to Be Significant

24 November 2020

By David Barwick – FRANKFURT (EconoStream) – The resurgence of the pandemic will probably leave ‘significant’ scarring effects on the economy, European Central Bank Governing Council member Olli Rehn said on Tuesday.

In an interview with Bloomberg, Rehn, according to a text provided by the Bank of Finland, which he heads, said that authorities should play it safe and ensure that financing conditions remain favourable.

`The scarring effects of the second wave are likely to be significant and it’s necessary therefore to maintain ample monetary and fiscal stimulus to alleviate these possible long-term effects, long-term ramifications of the crisis’, he said.’ It's a better to be safe than sorry and to avoid a premature tightening of financing conditions.’

With regard to the recalibration of the ECB’s policy stance on December 10, ‘the question for us is not whether we take measures or not, but instead which measures we should take. All policy decisions always involve a cost-benefit analysis. For me the prime candidates are PEPP [pandemic emergency purchase programme] and TLTROs [targeted longer-term refinancing operations].’

Whereas the PEPP is an attractive instrument for the present situation on account of its high flexibility as well as its dual function as a source of both stabilization and monetary stimulus, a recalibration of the TLTROs could be useful in mitigating a feared worsening of credit standards, he said.

‘The essential question is how we can ensure that the current financing conditions remain at the current favorable level for as long as necessary in the view of the crisis’, he said.

As for the likelihood of a rate cut, the proven effectiveness of the PEPP and the TLTROs made them ‘the prime candidates to be recalibrated in December’, he said. ‘That may not be an exclusive list. As we have said, we keep all options open at this point.’

Rehn denied specific concerns about overly high market expectations pertaining to December 10, claiming to always be concerned about observers’ monetary policy speculation. ‘But we'll examine the incoming data, we'll carry out our economic analysis -- both top-down and bottom-up and we will have the new perspective for 2021 to 2023 that will provide us with a strong foundation to take decisions in December that are appropriate to the moment’, he said.

The ECB was keeping an eye on national and European fiscal developments, he elaborated, calling these ‘very important’.

Following a stronger-than-expected 3Q, the worse-than-anticipated resurgence of the pandemic and resulting measures essentially ‘mean that the downside risks to the ECB's September forecast have largely materialized’, he said. ‘We can already see negative effects in some real-time data.’

While a vaccine or containment measures could limit the downside, there remains much uncertainty around the ECB’s central scenario that the ‘pandemic situation would ease by the middle of next year’, he said. ‘That's why in the grand scheme of things fiscal and monetary policies are there to support households and companies and we'll need this still for quite some time.'

According to Rehn, ‘substantial fiscal support is needed this year and next year. Not forever, but still next year as well.’ In this context, he urged the adoption and implementation of the Next Generation EU recovery fund.

Turning to the ECB’s ongoing strategy review, Rehn said a ‘key’ issue was the relative remoteness of problems of high inflation and the greater relevance of too-low inflation. As a consequence, ensuring inflation expectations don’t persist at too low a level, he said, is ‘the essential challenge that’s of course related to the discussion on the lower level of a neutral rate of interest.’

One solution involves ‘a clear and genuinely symmetric definition of price stability’, while the other is ‘a reaction function that underlines the commitment to symmetry and also takes into account the increased probability of monetary policy hitting the lower bound of interest rates’, he said.

Rehn argued that a ‘symmetric point target’ would be best, as ‘it anchors inflation expectations rather effectively and will enable clear communication’. He advocated a medium-term orientation as having the needed flexibility, so that ‘no range is needed for that purpose either.’

In other comments, Rehn called Brexit ‘a big, regrettable mess’.