Lagarde Says ECB Won’t Be Constrained in Fight Against Virus
ECB Keeps Pandemic Stimulus Steady on Eve of EU Recovery Talks
(Bloomberg) -- European Central Bank President Christine Lagarde said she won’t let monetary policy be constrained as she fights to support the euro area’s economic recovery from the coronavirus crisis.
She said the central bank currently expects to spend the full amount of its pandemic bond-buying program, in apparent contrast to some policy makers, including Executive Board member Isabel Schnabel, who recently said going that far may not be necessary.
That comment, in response to a question in Lagarde’s press conference after the ECB’s latest policy meeting, didn’t fully reflect the Governing Council’s discussion, according to people familiar with the matter. Policy makers didn’t come to an agreement on whether the full program was likely to be used.
Lagarde also insisted that officials will continue steering purchases toward the countries that most need support during the pandemic, such as Italy. That’s an issue which is already causing consternation among some policy makers who fret that the central bank might be seen as breaching laws banning it from directly financing governments.
Italian 10-year bond yields fell to a four-month low as Lagarde made that pledge and expressed anticipation that a European Union recovery facility will be approved.
The ECB chief spoke after her Governing Council agreed on Thursday to keep its bond program unchanged at 1.35 trillion euros ($1.5 trillion) and the deposit rate at -0.5%.
“Ample monetary stimulus remains necessary,” she told reporters in Frankfurt. “The Governing Council remains fully committed to doing everything necessary within its mandate to support all citizens of the euro area through these extremely challenging times.”
With coronavirus cases contained in most of Europe and economies reopening, officials have time to judge whether the recovery will be sustained.
Still, the outlook remains fragile and much depends on whether EU leaders can settle their differences over their groundbreaking 750 billion-euro recovery fund when they meet in Brussels on Friday.
Dutch Prime Minister Mark Rutte has spearheaded resistance to the proposal in its current form, calling for stronger conditions tied to EU grants. He told members of parliament on Tuesday that he is “somber” about the summit.
Lagarde said it is important for leaders to “quickly agree” on a package.
“You are carrying a lot of hopes and expectations and we hope that you succeed,” she said. “My sense is that a very large number of leaders are aware of the importance of not wasting time.”
While ECB policy makers have started to sound slightly less pessimistic about the rebound in recent public appearances, they remain wary of another spike in infections -- a risk underscored by local outbreaks in some regions and a resurgence in the U.S.
They’ve also warned that the path back to pre-crisis levels of activity will be arduous, marked by higher unemployment and bankruptcies that could increase sharply when government aid programs end. Countries will have to work out how to deal with the massive debt burdens they’re building up.
What Bloomberg’s Economists Say
“The European Central Bank is moving to a phase of managing the recovery from one of firefighting. This new stage in the battle against the economic devastation wreaked by Covid-19 will require more data to act than the Governing Council had today.”
-David Powell and Maeva Cousin. Read their ECB REACT
A recent ECB survey showed financial institutions nervous of the economic outlook preparing to tighten lending standards considerably, which could dampen growth.
Most economists surveyed by Bloomberg expect another 500 billion euros to be added to the pandemic purchase program by the end of this year.
The European Commission last week projected an economic contraction of almost 9% for the euro area this year, in line with the ECB’s June assessment. It also warned that southern European nations including Italy and Spain face a much bigger hit than northern countries such as Germany.
Lagarde backed that view.
“Before Covid-19 hit, there was already a divergence and degree of divergence among member states,” she said. “There’s a risk that divergence persists, which should be avoided. That’s why we welcome the recovery fund.”
©2020 Bloomberg L.P.