ECB Seeks New Gauges by March to Aid Pandemic Stimulus Plans
The European Central Bank headquarters in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

ECB Seeks New Gauges by March to Aid Pandemic Stimulus Plans

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European Central Bank officials have asked staff to propose new ways to measure financial conditions in the euro area, potentially assisting future decisions on how much stimulus the region’s pandemic-hit economy needs.

The central bank’s Monetary Policy Committee was tasked with making proposals in time for the March policy meeting, according to people familiar with the debate. Some officials want new ways to measure the impact of the ECB’s record-low interest rates and asset purchases on credit conditions, the people said, who asked not to be identified as the discussions were private.

An ECB spokesman declined to comment on the discussions.

The ECB ramped up its monetary policy support to the economy in December and partly justified the decision with the need to preserve “favorable” financing conditions for businesses and households. As the meaning of that term hasn’t been made clear yet, investors have little insight into what conditions would prompt further action from the Frankfurt-based central bank.

President Christine Lagarde was quizzed on Thursday about which indicators officials are considering in their judgment, to which she responded saying she and her colleagues would take a broad approach.

“Our assessment of favorable financing conditions is not driven by any single indicator,” she said. “It is a holistic approach. It takes into account multiple indicators. Bank lending is one, credit conditions is one, corporate yields is one, sovereign bond yields is one, and it is by combining all of those that we try to assess whether financing conditions are favorable or not.”

Chief economist Philip Lane oversaw discussions on various options during their meeting this week -- ranging from choosing a more or less loose set of indicators to building fixed indexes, the people said. They also highlighted that -- whatever the conclusion -- sufficient flexibility and room for judgment needed to be maintained. Not all ECB officials agreed on the need for new gauges.

“We see a big risk that the adoption of an intermediate target -- i.e. financial conditions -- takes the focus away from the ultimate target -- i.e. inflation,” Greg Fuzesi, an economist at JPMorgan Chase & Co., said in a report. “In particular, the current level of financial conditions is clearly not calibrated to boost inflation to the target over a normal timeframe.”

The euro edged lower on Friday morning and Italian bonds extended declines, pushing the spread on the nation’s 10-year yields over German debt to the highest since November.

During a separate seminar on policy instruments that’s part of the ECB’s strategic review, officials also discussed the future of its asset-purchase plans, and whether elements of the pandemic emergency purchase program should remain and be applied to an older asset-purchase program.

Some officials argued combining features of the PEPP and the Asset Purchase Program would allow the ECB to maintain some flexibility on securities buying that proved successful in keeping in check the spreads of Italian, Spanish, Greek and other sovereign debt yields during the pandemic. Others insisted the pandemic program should remain a temporary tool.

The seminar discussed other broad concepts, including yield-curve control, as part of continued talks tied to the ECB’s strategy overhaul, rather than proposals to be immediately put to use. The ECB is set to present some of the conclusions from that exercise after the summer.

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