In response to the "serious", but hopefully "temporary" negative impact of the COVID-19 virus pandemic on the euro area economy, fiscal authorities must be at the forefront to act swiftly, ambitiously and collectively, ECB President Christine Lagarde said on Thursday 12 March in Frankfurt.
The Governing Council supports the work being done by euro area governments to equip their health systems to combat the pandemic and the accompanying measures being developed by the European institutions, which are due to be presented on Friday (see EUROPE 12444/8, 12444/9). It hopes that the Eurogroup, on Monday 16 March, will already be in a position to take decisions on this matter (see EUROPE 12441/17).
New accommodating monetary measures. But the current pandemic, whose epicentre is currently in Europe, represents "a major shock" for the euro area economy by disrupting international production chains and reducing consumption, Lagarde added.
Such a situation therefore requires the ECB to take additional accommodating monetary policy measures on three fronts: - the massive provision of liquidity to economic operators; - support for the granting of credit to the real economy; - the preservation of financial stability.
By "unanimity", the Governing Council therefore decided to adopt further strong measures, which it hopes will be temporary. The package, which the financial markets did not welcome with relief on Thursday, first of all provides for additional targeted longer-term refinancing operations (TLTROs) to serve as a backstop, if necessary.
Second, very favourable financial conditions and access to larger financial volumes will be provided by the ECB in the context of the refinancing operations (TLTROs) over the period June 2020-June 2021. "These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises", Ms Lagarde said.
The ECB also decided to allocate an envelope of €120 billion for 2020, in addition to its existing asset purchase programme (APP), which was relaunched in September 2019 despite the internal divisions within the European institution. The objective is to maintain favourable market conditions in this period of acute uncertainty.
The APP operation will continue as long as necessary for an extended period until policy rates are raised. On Thursday, the monetary institution did not change these rates, which will remain very low, or even negative, until inflation has returned to a medium-term path in line with its fundamental mission, i.e. a level close to, but below, 2%.
Is the relaunch of the massive repurchase of government or sovereign bonds conceivable if a country, such as Italy, is once again heckled on the financial markets? "We are not here to close spreads. There are other tools and other actors for that", Lagarde said. However, we will deploy all purchase programmes to focus on problems where they are and, "trust me, we’ll do that", she promised.
Moreover, the ECB acting as the single European banking supervisor has decided to apply the banking supervisory framework in a flexible manner in order to overcome the current situation. Banks will thus be allowed to operate temporarily below certain levels of capital normally required (Pillar 2 Guidance, capital conservation buffer, liquidity coverage ratio, countercyclical capital buffer). They will also be able to use certain capital instruments that would not normally qualify as Common Equity Tier 1 (CET1) capital. The latter provision should have entered into force in January 2021 in accordance with EU prudential rules ('CRD V' Directive).
On the question of the appropriate level - national or European - to provide public guarantees to the banking sector, Mrs Lagarde did not decide, limiting herself to asking political decision-makers to act quickly so that bank credits continue to irrigate the real economy.
Growth significantly revised downwards for 2020. The COVID-19 pandemic is only partially reflected in economic forecasts. Thus the monetary institute now forecasts GDP growth in the euro area of 0.8% in 2020, 1.3% in 2021 and 1.4% in 2022.
Citing a clear downward balance of risks, Lagarde said that the slowdown in growth will be particularly severe in the first half of 2020, with an improvement expected in the second half of the year. These forecasts do not include the decision taken the day before by US President Donald Trump to suspend flights coming from member countries of the Schengen area of free movement of persons.
On the inflation front, the outlook for price increases on an annual basis remains broadly unchanged: 1.1% in 2020, 1.4% in 2021 and 1.6% in 2022.
See last ECB decisions: http://bit.ly/3cMySPA (Original version in French by Mathieu Bion)