–Minutes of December Meeting Suggest Council May Not Exhaust Emergency QE Allocation
By Laurie Laird
LONDON (MaceNews) – The European Central Bank could rely more heavily on its long-term refinancing operations in combatting the Covid-related economic downturn, although minutes of the December rate-setting meeting suggest some disagreement about the appropriate policy path.
“The focus on preserving favourable financing conditions implied a move away from a constant monthly pace of purchases,” according to an account released on Thursday, implying that the Bank may use “less than the entire [PEPP] envelope over time.”
ECB President Christine Lagarde pre-empted the minutes on Wednesday, telling a Reuters online question-and-answer session that the bank will “focus on favourable financing conditions … If we don’t need the entire envelope” of the Pandemic Asset Purchase Programme “so be it.”
That suggests a greater reliance on the Bank’s Targeted Long-Term Refinancing Operations (TLTROs) – which extend conditional lending at a rate as low as -1.0%. At the December meeting, the Governing Council extended the scope of the programme by one year to June of 2022, but members overruled Chief Economic Philip Lane’s recommendation to lift TLTRO borrowing allowances to 60% of a bank’s loan book, instead approving a five-percentage-point rise to 55%.
“A number of reservations were expressed” with some members fearing the larger proposed increase “would make banks increasingly dependent on the Eurosystem as their funding source and could induce banks to invest more in sovereign debt.”
Adjustments to the TLTRO scheme weren’t the only source of disagreement last month. While the minutes confirmed that “all [Governing Council] members agreed” on the need for “additional monetary policy measures,” adjustments to the PEPP also merged as a point of contention.
Members approved Lane’s proposal to expand the PEPP by €500 billion to €1.85 trillion, extending the scheme by nine months to March of 2022, but the decision was not unanimous.
“A more moderate increase in the PEPP envelope was advocated by a number of members based on the argument that significant space for purchases was still available from past decisions,” according to the minutes.
However, “some arguments were also made in favour of a larger envelope,” given the Bank’s perennial failure to reach its inflation target of close to but below an annual rate of 2%.
President Lagarde has implied some disagreement amongst rate setters, declining to answer direct questions about the council’s unanimity when addressing the media following the December Governing Council meeting.
The Bank refused to rule out adjustment of its suite of interest rates, which have have not moved since the start of the pandemic, with the main bank deposit rate anchored at -0.5%.
The Governing council appeared to take a more relaxed attitude toward exchange rates than at the October meeting, noting only that members voiced concerns “over risks related to developments in the exchange rate that might have negative consequences for the inflation outlook.”
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Contact this reporter: laurie@macenews.com.
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