ECB’s Schnabel Warns Against Hopes for Blockbuster Stimulus

(Bloomberg) -- The European Central Bank should focus on keeping financial conditions at current levels through the crisis rather than announcing a blockbuster stimulus package that beats market expectations, according to Executive Board member Isabel Schnabel.

Just over a week before the ECB Governing Council’s policy decision, Schnabel confirmed that more support is likely because the pandemic will be more protracted than expected. “This has to be reflected in our policy decisions,” she said in an interview on Monday.

But she also noted that borrowing costs have dropped to record lows because of monetary and fiscal aid, and what is most important is sustaining that state of affairs until the crisis is past.

“It is appropriate to focus on preserving these conditions rather than easing much further,” she said. “If it’s necessary to do something that doesn’t meet market expectations, we have to do that nevertheless.”

The yield on Italy’s benchmark 10-year debt climbed as much as four basis points to 0.67% after the interview was published. That’s the highest since Nov. 19, widening its premium over German counterparts two basis points.

Economists predict the ECB will expand its 1.35 trillion-euro ($1.6 trillion) pandemic bond-buying program by around 500 billion euros, extend it by at least six months to the end of next year, and offer more long-term loans to banks. Societe Generale SA and Commerzbank AG both predict an extra 600 billion euros of purchases. Bloomberg Economics foresees 450 billion euros.

President Christine Lagarde and her colleagues have said those tools will be key to their Dec. 10 decision, with a cut in the deposit rate from the current -0.5% less likely.

Schnabel’s comments suggest she’ll argue for staying within such expectations on size, but stretching the duration out further. Asked if she’d back a 12-month extension of bond purchases until mid-2022, she replied that it is one of the options that will be considered.

She also signaled openness to extending the window -- currently June 2020 to June 2021 -- during which banks can access the “extremely favorable” interest rate of -1% on long-term loans. While not ruling out cutting that rate, she expressed reservations.

“There is no technical reason why this could not be lowered,” she said. “The question is whether this is considered appropriate.”

What Bloomberg Economics Says

“Lagarde doesn’t see the news that a coronavirus vaccine is near as fundamentally altering the central bank’s plan to add monetary stimulus.”

To read the full report, click here.

Schnabel, 49, is a former University of Bonn economist who joined the ECB this year after Sabine Lautenschlaeger resigned. She is seen as less hawkish than her German predecessors, and has pledged to counter criticism in her homeland of the central bank’s loose monetary policy.

As a member of the ECB’s six-member board, she’ll have a hand in making next week’s policy proposal. Some of her colleagues on the decision-making Governing Council may push for a bigger bond-buying program though, and the International Monetary Fund said on Monday that the central bank should consider all options, including cutting interest rates again.

While Schnabel has no prior central-banking experience, she was an adviser to German Chancellor Angela Merkel and has a long history of research into how financial systems cope with major shocks.

This pandemic caused the deepest peacetime recession in a century, and now a second wave of coronavirus infections has forced governments to impose new lockdowns that will likely push the economy into another contraction.

Progress on vaccines has been faster than expected, boosting optimism, but Schnabel said central banks and governments will be dealing with the economic scars for some time to come.

She urged politicians not to end their fiscal support prematurely, and said it’s “absolutely crucial” that European Union members reach agreement on their joint spending package as soon as possible. That 1.8 trillion-euro plan is being held up by Poland and Hungary, who object to disbursements being linked to democratic standards.

Schnabel was also unwilling to predict whether the ECB’s action next week will be its last burst of stimulus before the pandemic ends, or whether she’ll ever see monetary policy tightened before her term on the board concludes at the end of 2028.

“I indeed hope this will be the last big push, but we can never know what’s going to happen,” she said. “There is a positive scenario where we get a swift recovery and the scarring is relatively limited. But there is also the risk of the crisis being more protracted.”

©2020 Bloomberg L.P.