ECB’s Mersch: Recalibration Could Mean A Simple Extension in Time

25 November 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s recalibration of its instruments could be relatively straightforward and limited to a simple extension in time, Executive Board member Yves Mersch said on Wednesday.

In an interview with Financial Times, Mersch, according to a text made available by the ECB on Wednesday, suggested that an outcome of the recalibration involving new policy tools was only ‘theoretically’ possible.

The recalibration promised by the ECB for next month’s monetary policy meeting ‘could be rectification’, he said, ‘simply an extension on the time axis’ or ‘an extension of the volume or the intensity.’

Reiterating the ECB’s belief in the greater effectiveness of the pandemic emergency purchase programme (PEPP) and the targeted longer-term refinancing operations (TLTROs), Mersch said that ‘an obvious candidate for calibration is the timeline extension’, given the ECB had planned for these measures to run until at least June 2021 and that ‘the consequences of this pandemic probably have a longer duration than foreseen’ last June.

‘There is a second approach, to see whether we should become more targeted or more focused, or on the contrary consider now untested instruments, a theoretical possibility in an all-encompassing discussion’, he said.

Mersch appeared to throw cold water on the idea of another reduction of the deposit rate, saying that policymakers ‘have very little knowledge about when the reversal rate would be kicking in’ and that he ‘would rather not test that by all means, as it could diverge from one country to another.’

As to the economic impact of the second wave of the pandemic, Mersch sounded somewhat sanguine, calling the latest containment measures ‘much less growth-damaging and much more targeted’ and suggesting that the effect on national economies chiefly reflected the degree of dependence on the harder-hit services sector.

Still, with the possible exception of Germany, ‘it will probably be difficult to maintain positive growth going into the fourth quarter,’ he said. But he added quickly that it was too soon to assume that the newest blow to economic growth ‘will last into the next quarters of next year and there will be consecutive quarters of negative growth.’

The possibility of a €1.4 trillion increase in Eurozone banks’ portfolio of non-performing loans corresponds to ‘a severe, extreme scenario’, Mersch pointed out. ‘As of today, I do not see an economic situation that is going to lead to a severe scenario.’

Still, the debt moratoria are not permanent fixtures, he observed, and banks need to determine whether their debtors will be able to resume normal operations or have been more lastingly impacted by the pandemic.

The danger of fiscal dominance is low, Mersch indicated, given the prohibition on monetary financing and the ECB’s independence in law.