— Sheds Little Light on Bank’s Emergency Asset Purchase Allocation
By Laurie Laird
LONDON (MaceNews) – The European Central Bank does not believe the stricken eurozone economy now requires further interest rate cuts, a member of the bank’s rate-setting body said Tuesday.
“Currently, we consider asset purchases to be a more effective and efficient tool” than reduced borrowing rates, said Governing Council member Isabel Schnabel, answering questions via the bank’s Twitter feed. “But our experience with negative interest rates has been positive, and lowering interest rates remains an option for the future.”
The bank’s shaved its deposit rate to -0.5% in September, well before the onset of the COVID-19 shock, but has declined to reduce rates further in the two meetings since most of European implemented an economic lockdown. The bank announced an emergency asset purchase program at its April meeting, and increased the size of that package to euro1.35 trillion last week.
The Pandemic Emergency Purchase Program enhances the ECB’s flexibility, according to governing council members, allowing the bank to deviate from the capital key applied to its asset purchase program, which allocates bond buying according to the size of eurozone economies.
However, governing council members have been circumspect about the magnitude of bonds it has acquired from more-indebted and smaller eurozone economies, such as Italy and Greece.
“Our pandemic emergency purchase program offers the flexibility to deviate from the capital key as required to ensure a smooth transmission of our monetary policy to the entire euro area,” said Schnabel.
Schnabel joined the governing council in November, replacing fellow German economist Sabine Lautenschlager who resigned at the end of October. The ECB gave no reason for Lautenschlager’s departure, but many analysts believe she opposed the resumption of quantitative easing announced by Lagarde’s predecessor Mario Draghi, who also left the bank at the end of October.
Like other governing council members, Schnabel refused to be drawn on a recent German court ruling that found asset purchases to be incompatible with German law, saying only that the ECB is “subject to the jurisdiction of the European Court of Justice” and accountable to the European Parliament.
Schnabel did acknowledge that bank’s persistent failure to meet its inflation target of below but close to an annual rate of 2%, suggesting that the target may be the subject of debate during the bank’s upcoming strategy review. The ECB sees inflation falling to 0.3% in 2020, with growth contracting by 8.7% under its baseline scenario.
The ECB’s target “has served us well for the past 20 years. In our monetary policy strategy review, we will assess whether it remains appropriate for the future,” she said.