ECB Augments Existing Programs but Doesn’t Introduce New Ones

December 10, 2020

In a variety of ways, the central bank governing council expanded and in some cases extended the duration of non-interest rate monetary stimulus programs in order to preserve functional and accommodative financial conditions, promote economic recovery, and foster steady progress toward restoring the medium-term consumer price target which is a level “sufficiently close to, but below, 2 per cent within our projection horizon.” Tweaks to a variety of existing policy tools are detailed in President Lagarde’s introductory statement. New policy features were not introduced, and the ECB’s three main interest rates were left as is, namely a zero percent refinancing rate sandwiched between a -0.50% deposit rate and a 0.25% rate on the marginal lending facility. Forward guidance continues to reinforce the strong commitment to a prolonged application of appropriately accommodative monetary policy. No tool is exempt from additional modification in the future if circumstances require such action “to support economic activity and the robust convergence of inflation to levels that are below, but close to, 2 per cent over the medium term.” Officials will want to see, moreover, that convergence is consistently reflected in underlying inflation dynamics.

This week’s final scheduled policy review of 2020 coincided with the updating of growth and price forecasts by staff. For the first time, the forecast horizon was pushed out to 2023. Although growth in 2020 Q3 exceeded expectations, the resurgence of Covid is putting a big drag on the final months of the year. The risk to growth beyond the new forecasts is skewed to the downside, and projected growth in 2021 was cut 1.1 percentage points to 3.9%. The level of GDP will still be quite short of it’s pre-pandemic conditions at the end of next year. A 1.0 percentage point upward revision to growth in 2022 to 4.2% suggests that monetary and fiscal policy will be more stimulative during the whole of that year than officials were assuming previously.

Inflation forecast also imply this extended need for ultra-stimulus. Consumer prices are forecast to rise 0.2% this year, followed by 1.0% in 2021, 1.1% in 2022 and 1.4% in 2023. That’s an average 0.9% per annum over four years, which would need inflation over the following four-year period of over 2.5% a year in order to meet the symmetric average inflation goal of a little less than 2.0%. A year ago, the ECB projected inflation of 1.6% in 2022, and now it is projecting less than that figure for 2023.

In her press conference, President Lagarde seemed to acknowledge that the effectiveness of monetary policy is diminishing and that fiscal policy will be needed to more actively complement the monetary stance in the future if the shared goals of politicians and ECB officials are to be met fully.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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