ECB Wants Next Stimulus to Be Judged on Quality, Not Quantity
A Eurosystem monetary authority sign stands outside the European Central Bank (ECB) headquarters as climate activists hold a protest banner ahead of the bank’s rate announcement in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

ECB Wants Next Stimulus to Be Judged on Quality, Not Quantity

European Central Bank policy makers are trying to persuade investors not to focus too much on the size of their next dose of monetary stimulus, hoping they will instead look at its design.

President Christine Lagarde and colleagues have used a run of public comments to stress that December’s much-anticipated policy decision will aim to cement cheap money for the duration of the economic crisis, achieved through both asset purchases and more loans to banks.

ECB Wants Next Stimulus to Be Judged on Quality, Not Quantity

“What is really important is that we make sure that the financing conditions are stable, are conducive to economic recovery as it comes,” she said at Bloomberg’s New Economy Forum on Tuesday. Economic operators must “not only know that the level of financing is going to be there but that it will be available for a period of time that will last long enough.”

The emphasis might be an attempt to contain expectations for an out-sized increase in bond purchases beyond the additional 500 billion euros ($594 billion) anticipated by some economists, now that another contraction is materializing with resurgent coronavirus infections and new lockdowns.

ECB Wants Next Stimulus to Be Judged on Quality, Not Quantity

Whatever the motivation, Lagarde and her colleagues face a challenge in convincing observers conditioned by the ECB’s regular appetite for unveiling largescale government-debt purchases as a centerpiece of stimulus.

“They are clearly shooting for a package, and maybe worry that the market will focus on one number,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “They want to be explicit and targeted, and thinking specifically: ‘what you are trying to do?’”

Policy makers’ broad message is that what is most important about the ECB’s bond purchases are their timespan and deployment, and how they fit into a broader toolkit whose other elements can be even more potent.

“It’s not so much the overall number that matters,” Philip Lane, the ECB’s chief economist, told Portuguese television this week.

Recent ECB Remarks

  • “The context for the forthcoming decision in December is not whether we will decide on further additional accommodation in monetary policy, it is rather which instruments, in which scale and duration, will best serve the purpose.” Olli Rehn, Nov. 13
  • “It’s important that we maintain the flexibility in the execution of our program during this longer time frame to avoid problems of financial fragmentation.” Pablo Hernandez de Cos, Nov. 13
  • “We will continue in the same spirit to try to live up to our responsibilities and in the present crisis don’t forget that the toolbox that we have extended was the PEPP and the TLTRO-III.” Yves Mersch, Nov. 16.

Lane and his colleagues are confronting the limits of their tools. Policy makers have just about ruled out more interest-rate cuts, and while they insist they can always pump more liquidity into markets via asset purchases and bank lending, they’ve also warned such measures risk losing effectiveness.

In shifting investors’ attention from size to duration, officials might also be trying to avoid past mistakes. In 2015, then-President Mario Draghi fueled hopes before unveiling a package that underwhelmed markets, forcing him to act again just three months later.

A slow drip-feed for financial markets has already been working. Last week, in the midst of renewed lockdowns, policy makers bought 20 billion euros in bonds without causing alarm. At that pace, the program currently totaling 1.35 trillion euros would require just 500 billion euros more -- almost exactly matching estimates -- to extend it through the end of next year.

Against the backdrop of an ongoing economic crisis, and memories of the ECB’s initial reticence to calm government bond markets, officials are aware a low-ball approach could incite panic, tightening the very financial conditions they want to keep loose.

What Bloomberg’s Economics Says...

“We expect the envelope for the Pandemic Emergency Purchase Program to be expanded by a 450 billion euros, and to run through 2021.”

-Jamie Rush, Maeva Cousin and David Powell.

To read the full report, click here.

While the Governing Council broadly agrees on which tools to use, recent comments suggest a range of views on the most efficient policy mix.

Executive Board member Isabel Schnabel told CNBC that the potential side effects of ever-longer asset purchases warrant a discussion about their intensity. Estonia’s Madis Muller has argued companies and households would benefit most from another lending initiative, while France’s Francois Villeroy de Galhau said he sees “strong logic” to making support measures last longer.

Their judgment on the amount of stimulus needed will chiefly depend on the evolution of the pandemic. Stricter lockdowns, as currently discussed in many countries, will likely trigger more debt issuance by governments to finance support measures such as furloughs, which the ECB can hoover up.

“There are a number of issues they’ll have to bear in mind when deciding the amount of additional purchase, and one is how much issuance you can expect from governments,” said Anatoli Annenkov, economist at Societe Generale SA in London. “They probably want to be close to that number to signal to markets they will be there to absorb extra supply.”

ECB officials have another two weeks to fine-tune expectations before their traditional quiet period in the run-up to their Dec. 10 decision.

©2020 Bloomberg L.P.

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