ECB Stimulus Is Said to Have Needed Caveat to Win Hawks’ Support

The European Central Bank’s increase in emergency bond-buying won broad backing from policy makers only because hawkish officials secured a caveat specifying the whole amount might not be deployed, according to people familiar with the debate.

The compromise led to the ECB deciding that its 500 billion-euro ($608 billion) boost to its pandemic purchase program would come with wording in President Christine Lagarde’s opening statement that “the envelope need not be used in full,” said the people. They asked not to be identified because the discussions were private.

ECB Stimulus Is Said to Have Needed Caveat to Win Hawks’ Support

That clause, forcefully pushed by Executive Board member Isabel Schnabel, managed to win over several policy makers who were skeptical that the proposed stimulus was too expansive, the people said. Bundesbank President Jens Weidmann was a key holdout -- he favored more support but judged the scope of the program as going too far, according to one person.

The outcome casts light on the dynamics of Lagarde’s chairmanship of the Governing Council, suggesting that hawkish members might be holding more sway over its decisions than under her predecessor, Mario Draghi. The Italian’s impatience with dissent caused his tenure to end with an unprecedented row over a final salvo of quantitative easing.

Schnabel and ECB Chief Economist Philip Lane, who writes and presents the policy proposal, disagreed over the best strategy in initial discussions, some of the officials said. They both backed the final proposal on the Thursday, the people said.

Ahead of their final meeting, policy makers had intense debates about the design of the stimulus package that ultimately included an extension of emergency purchases by nine months through at least March 2022, and new long-term loans for banks at favorable conditions.

Extensions of the pandemic buying program of six to 12 months with amounts as high as 750 billion euros were floated, the people said. Nine months emerged as a compromise, in line with suggestions by the ECB’s Monetary Policy Committee, they added.

Vaccine Hopes

Their disagreement centered on different views about how quickly soon-to-be-available vaccines against Covid-19 will ignite a meaningful economic recovery, and concerns that ever-bigger government-bond holdings will complicate future monetary policy.

Policy makers including Schnabel have argued over the past weeks that the duration of central-bank support matters more than the size of stimulus. Lagarde picked up on the idea on Thursday when she highlighted that the latest measures where aimed at preserving, not easing, financing conditions.

Schnabel played a key role in securing a broad majority by backing the caveat, the people said. Lagarde was asked twice during a press conference following the policy announcement whether Thursday’s decision was unanimous but declined to answer on both occasions. Spokesmen for the ECB and the Bundesbank declined to comment.

Policy makers at the meeting also raised concerns that new generous loan offers to banks would attract demand from weaker lenders already monitored closely by the ECB’s supervisory arm, the people said.

Banks in Spain and Italy, where the economic impact of the pandemic is particularly bad, are suffering as companies and households struggle to repay their debts.

To forge a compromise, a proposal to increase borrowing allowances under the facility was watered down, the people said. Banks can now tap the ECB for amounts of up to 55% of their stock of eligible loans, an increase from 50% previously. Initial plans foresaw 60%.

©2020 Bloomberg L.P.

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