By Laurie Laird
LONDON (MaceNews) – Europe’s top central banker suggested that expanded asset purchases and enhancements to the Bank’s long-term finance scheme are best suited to counter the latest eurozone downturn, while urging national governments to keep the fiscal taps flowing.
“While all options are on the table, the pandemic emergency purchase programme (PEPP) and our targeted longer-term refinancing operations (TLTROs) have proven their effectiveness … they are therefore likely to remain the main tools for adjusting our monetary policy,” said ECB President Christine Lagarde in opening remarks before taking questions from members of European Parliament’s Economic and Affairs Committee on Thursday.
The ECB’s Governing Council has promised a “recalibration” of its monetary policy instruments at its meeting scheduled for 10 December, with containment measures related to the second wave of Covid likely to push the eurozone economy back into contraction.
Lagarde made little mention of interest rates in her prepared comments, saying only that “interest rate hikes should not be of immediate concern.” A handful of investment banks have recently raised questions over a resurgence of inflation, prompting a spirited discussion of the matter in the European financial media over the past week.
But with the ECB forecasting a 2% decline in euro zone output in the fourth quarter, the Bank may face more urgent questions over rate cuts. Members of the Governing Council have sent mixed messages about the efficacy of reducing the bank deposit rate further into negative territory. Earlier this month,
Bundesbank President Jens Weidmann spoke of further scope for rate cuts, but Governing Council colleague Yves Mersch recently noted that the so-called reversal rate, at which deeply negative interest rates discourage bank lending, “is yet another unobservable.”
The ECB has not reduced interest rates since the onset of the pandemic-induced financial crisis, with its main bank deposit rate remaining at -0.5%. At its latest Governing Council meeting, rate setters agreed to maintain the €1.35 trillion PEPP programme through at least June of next year. Parallel TLTRO operations allow banks to access some funding at a rate of -1.0%.
However, the ECB president was forced to defend the flexibility of the PEPP programme, in which the Bank may deviate from its capital key to skew bond purchases toward the more-stricken southern nations. That “flexibility was so necessary” to prevent the widening of yield spreads between member states during the early days of the crisis, she said. The design of PEPP is “fit for purpose to deliver on price stability,” Lagarde noted, adding that more recent PEPP transactions have hewn more closely to the capital key, which allocates bond purchase roughly in line with the economic size of member states.
Lagarde reiterated her plea that governments maintain a robust level of support to businesses and consumers hardest hit by the pandemic. “An ambitious and coordinated fiscal stance remains critical and we should by all means avoid cliff effects.”
The ECB president, who also serves as the Chair of the European Systemic Risk Board, voiced concern over the “liquidity tensions” posed by insurers, and repeated the ESRB’s call to impose capital buffers on insurers. Lagarde addressed the parliamentary committee on financial stability after taking questions about economic policy.
She reiterated concerns that legacy non-performing loans could hamper banks’ ability to weather the current economic downturn, noting that the return on equity for European financial institutions fell to just over 2% at the middle of 2020, “below the level observed” in previous crises. Lagarde declined comment on extending the prohibition on European bank dividends, noting that the ESRB is “weighing up all the options” in conjunction with ESRB member institutions.
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Contact this reporter: laurie@macenews.com.
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