ECB Brief: The More Things Change, The More They Stay The Same

27 April, 2021

By David Barwick – FRANKFURT (Econostream) – Early last October, medical science remained far from being able to offer a proven solution to the Covid-19 pandemic; despite relevant processes being vastly expedited, the first approval was still months away. A solution was sorely needed in Spain, among many other places, as the country was in the midst of its largest wave of new cases thus far.

In terms of monetary policy, the ECB was still on hold as it allowed its earlier decisions time to unfold their full impact. These included a near doubling of the envelope of the pandemic emergency purchase programme (PEPP) in June, when the Governing Council also extended the horizon for net purchases under the PEPP through at least June 2021 and promised to reinvest maturing principal payments until at least end-2022.

But by September there were already numerous members of the Council who were agitating for another round, and indeed so vigorously that action at the policy meeting scheduled for October 29 seemed remotely conceivable, even though that would have been highly unusual, given the absence of updated staff macroeconomic forecasts.

Not most reticent among those clamouring for further monetary stimulus was Banco de España Governor Pablo Hernández de Cos. In an appearance on October 6 before the Congress of Deputies, the lower house of Spain's legislative branch, de Cos made his views clear:

‘Looking ahead, the fragility and heterogeneity of the euro area recovery, medium-term inflation expectations that are well below our objective and nominal effective exchange rate developments that have offset much of our stimulus in recent months suggest that there is no room for complacency’, he said.

Nearly seven months on, multiple high-efficacy vaccines are available and many developed economies have made much progress en route to herd immunity. Against this backdrop, even in the euro area, where the progress has been somewhat bumpy, a firm economic recovery is expected in the second half of the year.

Meanwhile, the PEPP has been stocked up yet again, the purchase pace hiked, the horizon for net purchases extended by another nine months through at least March 2022, with reinvestment of maturing principal payments prolonged by not less than another full year until at least end-2023.

In brief, we are in a different world.

Or are we?

In an article appearing Monday in Spanish magazine Economistas, de Cos again took a stand:

‘Looking ahead, the high uncertainty and fragility of the euro area recovery, medium-term inflation expectations that are well below our objective and nominal effective exchange rate developments that have offset much of our stimulus in recent months suggest that there is no room for complacency regarding monetary policy’, he said.

To be clear: the point is not that a speechwriter recycled previously approved material to facilitate the process of producing new content; this is standard practice and helps ensure continuity and consistency where appropriate.

The point is rather that it scarcely matters how much the external environment changes; for a certain faction of the ECB’s Governing Council, it is hard to imagine what too much monetary accommodation would even look like. Conscious of their still decent though probably dwindling chances of ramming more policy stimulus through in the name of the pandemic, they will leave no stone unturned in the effort.

And so it is that the more things change, the more they stay the same.