November 29, 2020

The ECB sees room for further lowering rates


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The European Central Bank could cut interest rates again at its next meeting in December. That is what the director of the German ECB recognizes, Isabel schnabeHe, a member of the Executive Committee, in an interview published by the German salmon daily Handelsblatt. “Our analyzes show that a further reduction would be possible, without reaching the point where it no longer works or even damages,” he assures, despite the fact that the reference interest rates for his refinancing operations have already been forced to 0% , while the deposit facility rate will continue at -0.50% and the loan facility rate at 0.25%. Schnabel justifies a new step towards free money in the need to protect credit standards.

This German economist, a professor at the University of Bonn and also a member of the German Council of Economic Experts since 2014, points out that the economic situation is now different from that of March. At the time, the top priority was to stabilize financial markets. Now it’s about ensuring that banks don’t tighten their credit standards too much. “We are watching him closely. The banking sector must not exacerbate the economic recession, “he warns, although he acknowledges that a preliminary decision has not yet been made.

At its board meeting last week, the ECB decided to review the use of its monetary policy resources and promised further relaxation. In the pandemic and the collapse of the European economy as a result of the virus, the ECB has so far refrained from making further rate cuts, but according to Schnabel the deposit rate for banks could be lowered further.

Another powerful instrument of the ECB is its emergency PEPP program, which aims to be a temporary reaction to the health crisis and includes the purchase of bonds worth 1.35 trillion euros. There are sources that suggest that the ECB could decrease its support to the most indebted countries when it prepares a new stimulus package next month, to encourage them to borrow from the EU linked to productive investments. The council is already debating whether the ECB should extend its Pandemic Emergency Purchase Program (PEPP), which provides unprecedented flexibility in the purchase of bonds from any country in trouble, or its Asset Purchase Program ( APP), in which purchases must reflect the relative size of each country. This is because the PEPP has reduced both the costs of borrowing for governments such as Spain and Portugal, which are avoiding EU loans tied to digital and green investments in favor of obtaining unconditional cash in the bond market. The composition of the package should be decided at the ECB’s monetary policy meeting on December 10 and sources assured that a compromise could be among the alternatives, with the PEPP and the APP expanding but with the former being the main instrument.

The ECB has significantly overbought Italian and Spanish bonds under the PEPP since the first wave of the pandemic, helping to reduce their yields to pre-health crisis levels, a welcome relief for their governments at a time of stress. But by doing so, it has made loans from the EU’s Next Generation fund less attractive. This type of official credit, disclosed in response to Covid-19, must be spent on digital or green projects and must be scrutinized by the EU, making it less acceptable to governments than selling bonds when the interest rate differential it is small.

And another important novelty for the next board meetings will be the proposal from the Governor of the Bank of Finland, Olli Rehn, that suggests that the ECB should review its monetary policy not just this time, but regularly in the future. “I would consider it a good idea for us to review the monetary policy strategy on a regular basis for the future, for example every five years,” he suggested at a Bank of Finland event.

The members of the council have begun to position themselves before a meeting, the one in December, in which important decisions will be made. Luxembourg Central Bank Governor Yves Mersch has confirmed that the ECB is ready to provide further support to the economy, but notes that it should also assess the unwanted side effects of any potential measures. Mersch argues that all potential instruments could be up for discussion at the December 10 meeting and that the ECB authorities will also discuss the flexibility of their tools, including the € 1.35 trillion PEPP asset purchase program, but remember that fiscal policy is still the most important tool to help the real economy and that it is not the bank’s job to grant credit directly to companies.

The second wave of Covid-19 and the measures taken by governments to contain the pandemic are generating “a clear deterioration” in the economic outlook of the euro zone in the short term, the president of the ECB, Christine Lagarde, acknowledged in her last appearance. who sees that risks are “clearly” sloping down. The macroeconomic projections to be released by the ECB team in December will allow the body to carry out a more detailed assessment to recalibrate its monetary policy response.

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