Lane Says ECB Is Monitoring Markets, Ready to Boost Buying

(Bloomberg) -- The European Central Bank is monitoring market developments closely and is fully prepared to expand its emergency bond-buying program if needed, Chief Economist Philip Lane said.

Speaking some two weeks before the ECB’s next policy meeting, Lane stressed the importance of monetary support reaching all 19 members of the euro area as they try to rein in the impact of the coronavirus pandemic.

“We continuously examine each of our measures to assess whether these are still adequately calibrated and appropriately sized to provide the necessary degree of accommodation in this uncertain economic environment,” he told a webinar on Tuesday. “Accordingly, we are fully prepared to further adjust our instruments if warranted.”

Policy makers have been sending strong signals that the ECB will increase the size of its 750 billion euro ($821 billion) emergency bond-buying plan, potentially as early as next month, to support the region during its worst postwar economic crisis.

Since the program’s start in late March, the ECB has focused purchases on countries including Italy to avoid a situation where rising yields cancel out stimulative effects of loose monetary policy for all euro countries.

Lane said the embedded flexibility allows for “fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions,” calling them “a crucial element in fostering its effective market stabilization function.”

“The goal is to stabilize and improve financial conditions in response to this large shock,” he said in response to a question on the ECB’s long-standing rule that debt purchases should be proportionate to the size of each economy. “I don’t think it’s particularly productive to zero in on operational details. We’ve said that we have the flexibility as needed to deviate from capital key, and that’s what we’re doing and that’s what we’re going to do.”

While ECB buying has prevented severe disruptions in European bond markets, the economy still suffered badly from restrictions imposed to contain the virus. Output shrank nearly 4% in the first quarter and is set to decline significantly more in the current period.

ECB staff are working on a new round of forecasts that will be presented to the Governing Council at their June 4 meeting. The ECB is working under the assumption that the economy will hit the bottom in the second quarter, Lane said.

After increased calls on governments in recent weeks, the ECB’s efforts are finally set to get some fiscal backing. Germany and France laid out a plan on Monday that would see the European Union collectively finance its response to the virus-induced recession.

While lauded by ECB President Christine Lagarde as ambitious and welcome, the proposal for a 500 billion-euro recovery fund could still be doomed by opposition from countries including Austria and the Netherlands.

©2020 Bloomberg L.P.