ECB’s Schnabel: Euro’s Strength Also Due to Better Global Outlook

17 December 2020

By David Barwick – FRANKFURT (Econostream) – An improved global economic outlook is contributing to the strength of the euro, European Central Bank Executive Board member Isabel Schnabel said Thursday.

Writing in a Twitter interview, Schnabel rejected both the possibility of cancelling national debts and the discussion of such a move.

‘Our analysis shows that several factors have been behind the recent appreciation of the euro, including prospects of a faster global recovery’, she said.

Were the ECB to simply cancel national debts it had accumulated through asset purchases, this ‘would constitute a clear violation of the European Treaties’, she said. ‘The debate is harmful and should be stopped.’

How long the ECB will continue to buy assets under the pandemic emergency purchase programme ‘will depend on the evolution of the pandemic and its consequences for the economic and inflation outlook’, she said.

The ECB is unconcerned about TARGET2 balances, these being in large part ‘a technical consequence of our asset purchases as these are often conducted through financial centres’, she said.

Schnabel was asked why the ECB had not recalibrated its tiering system. The tiering system, which went into effect a year ago, establishes how different portions of the money a credit institution has on deposit at the ECB are treated under the negative interest rate regime. In particular, an interest rate of zero is applied to an amount of money up to six times the minimum reserve requirement of a given bank. To the rest of the bank’s deposits, the ECB applies the deposit facility rate, which has been at -0.5% since September of last year.

‘The tiering system is working as intended, namely to preserve the accommodative impact of our negative interest rate policy while alleviating its most direct negative side effects for banks’, she said. ‘We are continuously monitoring the development of excess liquidity.’

How official interest rates evolve ‘depends on the inflation outlook, which is currently subdued’, she said. ‘We expect rates to remain at present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%.’

The ECB is ‘undeterred’ in its commitment to restore price stability, she said. ‘But the speed of return depends on the shocks we are facing.’

Schnabel urged that fiscal support not be withdrawn too soon. ‘It is important that fiscal and monetary policies work hand in hand to overcome this deep crisis’, she said. ‘The role of monetary policy is now to preserve favourable financing conditions and support the recovery. This will also improve the fiscal situation.’