–Inflation Forecast Reduced for 2020; HICP Not Expected to Reach Target Before 2024
By Laurie Laird
LONDON (MaceNews) – The European Central Bank Thursday expanded its emergency asset purchase and lending programmes at its latest policy meeting but left its key rates unchanged, raising questions about whether European borrowing costs have reached its so-called “reversal rate.”
The council increased the envelope of its Pandemic Emergency Purchase Programme by €500 billion to a total of €1.85 trillion and extended the duration of the PEPP to at least March of 2022, from the previous end date of June 2021.
The ECB has relied heavily on the PEPP, which allows the Bank to skew purchases toward more severely stricken economies. The bank will continue to purchase bonds under its Asset Purchase Programme – which predates the pandemic – at a monthly rate of €20 billion. APP activity hews closely to the Bank’s capital key, which allocates purchases in proportion to member states’ economic heft.
The “recalibration” of monetary policy, promised back in October, after the ECB made no change to its policy instruments, was concentrated on the “instruments that were most effective” in stimulating activity during earlier stages of the downturn, said ECB President Christine Lagarde, briefing journalists after Thursday’s meeting.
The Bank also extended the horizon of its Targeted Longer-Term Refinancing Operations (TLTROs) by one year to June of 2022. The programme allows banks to borrow at a rate of -1.0% under certain conditions. The ECB increased the amount that banks can borrow in TLTRO operations by five percentage points to 55% of their stock of eligible loans. The adjustments to the programme came after the Governing Council noted “a bit of tightening” in lending standards, said Lagarde. “We were beginning to see some signals about the terms and conditions issued to borrowers.”
However the ECB did not adjust its suite of lending rates, retaining the deposit facility at -0.5%, the level held since before the onset of the pandemic-induced economic crisis. That raises questions over the Governing Council’s attitude toward the so-called reversal rate, at which low rates crimp lending, with members of the governing council sending mixed messages about the efficacy of reduced rates over recent months.
Lagarde declined to answer direct questions about the council’s unanimity in reaching Thursday’s monetary policy decisions and did not publicly bid farewell to long-term Governing Council member Yves Mersch, who attended his last meeting on Thursday. Mersch has questioned the merits of further rate cuts and been publicly lukewarm about Lagarde’s first year as ECB president.
The president was also reluctant to discuss the continued strength of the euro, which has appreciated by 8% against the dollar this year. The euro touched $1.2159 following the ECB briefing, in touching distance of the more than two-year high hit last week. “Clearly exchange rates and the appreciation of the euro play an important role” in meeting the ECB’s inflation target and, “We will continue to monitor it going forward,” she said.
However Lagarde did mention the strength of the euro – along with weak demand – as factors likely to keep inflation in check over the medium term. The ECB reduced its inflation forecast for 2020 to 0.2% from the 0.3% predicted in September, while maintaining its 2021 forecast at an annual rate of 1.0%. The Governing Council does not expect inflation to return to its target of close to but below 2% over its forecast horizon, which ends in 2023. “Inflation is disappointedly low,” said Lagarde.
The ECB upgraded its 2020 growth forecast to -7.3%, up modestly from the -8.0% contraction expected in September, although forecast growth in 2021 falls to 3.9%, from the 5.0% expansion predicted three months earlier. Recent reimposition of Covid lockdowns through much of Europe will push output 2.2% lower between the third and fourth quarter, Lagarde added.
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Contact this reporter: laurie@macenews.com.
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