ECB’s Schnabel: ‘Duration Is The Crucial Aspect’

1 December 2020

By David Barwick – FRANKFURT (Econostream) – How long financing conditions remain favourable is more important than additional quantitative monetary stimulus, European Central Bank Executive Board member Isabel Schnabel said Tuesday.

In an interview with Bloomberg, a text of which the ECB provided, Schnabel indicated that it might take longer than anticipated for the ECB to achieve its price stability objective, but said the time horizon was flexible.

As for the recalibration of the policy stance promised for December 10, ‘[i]t’s important to acknowledge that we have already achieved quite a lot’, she said, pointing to favourable financing conditions. The focus should be on preserving these conditions ‘for as long as necessary’, she asserted.

‘Given the high degree of uncertainty we’re still facing in the economy and the already very favourable financing conditions, I think it is appropriate to focus on preserving these conditions rather than easing much further. Duration is the crucial aspect. Markets, firms and households need to understand that we will be there for as long as necessary. This is the key part in my view.’

The approach must be discussed by the Council, she said, but yield curve control is not ‘on the table at the moment.’

Where the ECB does ‘have some flexibility is the time horizon over which we get back to the inflation aim’, she said. This is a function of the situation, and in the current one ‘it may take longer to achieve our aim’, she said. ‘This is not about complacency. We’re fully committed to that aim but the lags in monetary policy transmission vary with the state of the economy.’

Schnabel made clear that the Governing Council was not obligated to deliver in line with market expectations such as those calling for a €500 billion expansion of the pandemic emergency purchase programme (PEPP). ‘It’s not just the amount, it’s also the duration’, she said. ‘And it’s about communication.’

‘If it’s necessary to do something that does not meet market expectations, we have to do that nevertheless,’ she said. The staff projections, which would play an important role, ‘are still being finalised’, she added.

Still, she confirmed that the PEPP and the targeted longer-term refinancing operations (TLTROs) remained ‘likely to be the main instruments for our recalibration.’

Not for the first time, she expressed reluctance on the subject of a further interest rate cut. ‘So far in the pandemic, the combination of the PEPP and TLTROs has worked very well’, she said. ‘In the past we decided against further interest rate cuts. That doesn’t mean that we won’t cut interest rates in the future if there are changes in our assessment that justify such a step.’

Schnabel suggested that the pandemic would last longer than the Governing Council had anticipated in June, when it last recalibrated the PEPP. ‘I think this has to be reflected in our policy decisions’, she said. ‘For the previous decision, we had assumed that the pandemic period would extend until June 2021. Now this may appear too optimistic.’

Even if widespread immunity is achieved by mid-2021, ‘the economic crisis will take longer than the health crisis’ and this is what is of primary importance for monetary policy, she said.

As for the TLTROs, ‘there’s no technical reason why’ the effective interest rate of -1% could not be lowered yet further, she said. ‘If we come to the conclusion that the pandemic crisis phase takes longer than originally thought, this could also have an impact on the calibration of the TLTROs.’

Asked explicitly whether she meant that TLTROs were needed for longer, independent of a change to the rate, she replied: ‘What I said is that the duration of our main tools should be linked to the duration of the pandemic crisis phase, and this would refer both to the asset purchases and to the TLTROs. There are many parameters that could be adjusted: there’s the duration of the operation, there is the period of the reduced rate, and also the number of operations.’

Increasing the maturity to five years was not ‘the key point’, she said. ‘Three years is already quite long.’

Monetary authorities are ‘not happy’ with the current level of market-based inflation expectations, she said. ‘This should be absolutely clear.’ However, different measures reflect different expectations, a subject for discussion during the strategy review, she said.

The revised projections to be published on December 10 would reflect the downside impact of the pandemic’s second wave, but also the positive news regarding vaccines, which ‘shows that there is light at the end of the tunnel’, she said.

Still, quarterly growth in 4Q would most likely be negative, she continued. That weakness would probably extend into 2021, accompanied by subdued inflation, she said. Much depends on the speed of medical solutions, but ‘[w]e may see renewed lookdowns until widespread immunity has been achieved’, she said.

In other comments, Schnabel said with an eye toward an end to the crisis that she hoped that next week’s recalibration ‘will be the last big push, but we can never know what’s going to happen’, and that ‘there is some hope’ that interest rates will need hiking before her term at the ECB concludes at the end of 2027.