ECB’s Lane: Worsening Pandemic a ‘Significant Downside Risk’

25 January 2021

By David Barwick – FRANKFURT (Econostream) – The worsening of the pandemic and the public health policy response constitute a substantial downside risk to the outlook, European Central Bank Executive Board member Philip Lane said on Monday.

In a speech at the Lámfalussy Lectures E-Conference posted to the ECB’s website, Lane,who is also chief economist, said that ‘[t]here is considerable uncertainty about pandemic dynamics: the recent intensification of the pandemic in many countries (and the associated containment measures) represents a significant downside risk and also requires the prolongation of various fiscal support measures.’

‘At the same time, the launch of vaccination campaigns is a milestone in the eventual resolution of the pandemic health crisis, even if there is only cloudy visibility of the calendar towards sufficient immunity to enable the restoration of normal economic activity’, he said.

Amid high uncertainty, keeping financing conditions favourable ‘calls for a two-sided and flexible approach to the total scale of asset purchases under the pandemic emergency purchase programme (PEPP): if favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full’, he said.

‘Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation’, he added.

According to Lane, the way to the ECB’s monetary policy goals leads via favourable financing conditions for the duration of the pandemic, a commitment that has a stabilising effect and makes an adverse financial feedback loop less likely.

‘It also anchors the monetary policy stance: the amount of slack in the economy and the low levels of inflation expected in the latest macroeconomic projections make it essential to avoid any loss of confidence and crowding-out of economic activity that would be generated by unfavourable developments in financing conditions’, he added.

Favourable financing conditions, he said, are achieved by means of a policy mixture including the low deposit facility rate, forward guidance on interest rates, various liquidity-providing refinancing operations, and asset purchases under the asset purchase programme (APP) and the PEPP.

The PEPP’s role is ‘especially important’, he said, and contributes to both market stabilisation and to the monetary accommodation needed to restore inflation to its pre-pandemic path. It is particularly useful for maintaining at an appropriate level ‘the critical middle and long-end segments of the yield curve component of overall financing conditions’, he said, as a premature steepening would hamper the restoration of price stability.