ECB’s Schnabel: Still in Middle of Pandemic, Economy Still in State of Emergency
28 May 2021
By David Barwick – FRANKFURT (Econostream) – The euro area remains mired in crisis, European Central Bank Executive Board member Isabel Schnabel said on Friday.
In an interview with Reuters, Schnabel described the current juncture as ‘the middle of the pandemic’, which ‘is far from over’ in terms of either health or the economy, ‘a relatively large part [of which] remains in a state of emergency.’
With respect to monetary policy, the inflation outlook is what matters, being ‘the ultimate yardstick against which we measure whether the emergency is over, since we said that our tools are meant to offset the negative effect of the pandemic on the inflation outlook’, she said. ‘The recovery still depends on continued policy support. A premature withdrawal of either fiscal or monetary support would be a great mistake.’
That support would be there until the pandemic crisis is over and in any case until next March, she said. ‘Our intention was to remove uncertainty about a premature withdrawal of support’, she added.
Progress in vaccinating citizens, fewer new Covid-19 cases and the removal of containment measures give the ECB ‘reasonable confidence that we have reached a turning point’, she said. Higher demand backed by ‘quite strong’ sentiment indicators and ‘sharply’ higher consumer confidence ‘sets the stage for a firm recovery.’
‘The short-term outlook has brightened’, she said. ‘We can be confident that a large share of the population will be vaccinated by the end of the summer’.
Schnabel left open whether she considered financing conditions still favourable on balance, calling recent nominal yield developments ‘more clearly related to an improvement in the euro area’s growth outlook rather than to foreign spillovers’ and thus ‘precisely what we would expect and what we want to see.’
Real yields having been broadly stable, ‘from this perspective, I would certainly say that financing conditions remain favourable’, she said. However, the fact that government bond yields have been outpacing risk-free rates ‘may point to changes in the expected amount of duration supply, and this could be related to expected changes in our asset purchases’, she said. ‘This would be a source of concern.’
Asked outright whether the time had come to slow down pandemic emergency purchase programme (PEPP) purchases to the pace of the first part of the year, Schnabel sought to clear the air by establishing that the PEPP was ‘linked to the pandemic and, second, the volume of our purchases is data-driven.’ The ECB would make a comprehensive assessment next month that ‘will then determine what is going to happen with our asset purchases’, she said.
‘The whole concept underlying the PEPP is inconsistent with the idea that there will be a mechanical tapering of asset purchases’, she added. ‘We always have to be willing to reduce or increase asset purchases in line with our promise to keep euro area financing conditions favourable and to offset the impact of the pandemic on the inflation outlook.’
Regardless of the outcome on June 10, a renewed expansion of the PEPP might not be necessary, she suggested. The remaining envelope being still ‘quite large’, she said, ‘[f]or now, it doesn’t impose any restrictions on our decisions.’
Indeed, she continued, a discussion of the envelope’s size is ‘premature’ and ‘will become relevant only well into the future.’
Schnabel appeared uncomfortable at the idea that the PEPP would eventually simply pass the baton to the asset purchase programme (APP), calling these ‘separate programmes [that] serve different purposes.’ The PEPP would end after having offset the pandemic-related downward shift of projected inflation, she said.
APP was one of the ECB’s ‘other tools to bring inflation back to our aim’, she said, along with targeted longer-term refinancing operations (TLTROs), negative interest rates and forward guidance. It being unlikely that the ECB would have reached its objective when the PEPP ends, these would form the basis of an ongoing ‘highly accommodative monetary policy’, she said.
There was no current need to adjust the deposit facility rate, she said, implying that she was reasonably relaxed about the euro’s recent appreciation and saw it as being ‘in the context of an improved economic growth outlook’.