To support the euro area economy in the face of the second wave of the Covid-19 pandemic, the European Central Bank (ECB) will recalibrate its already very accommodative monetary policy by December at the latest.
“We have done it in the past, we’ll do it again for the second wave”, said ECB President Christine Lagarde on Thursday 29 October, after the Governing Council meeting.
Noting a “sharp increase in downside risks” for the euro area economy, the ECB will analyse the economic forecasts of its services expected for December and, on that basis, “recalibrate its instruments” to address the economic and financial impact of the renewed lockdown measures being taken by euro area countries.
“Recalibrating means that we will identify the optimal ways to use one or more instruments and clearly extend our work in terms of duration, volume and attractiveness”, Lagarde said.
According to the former IMF head, there was no question on Thursday of taking monetary policy decisions on the same day, but the Governing Council is able to meet “very quickly” by videoconference, she said. In this way, she did not rule out decisions being taken before the next regular meeting on Thursday 10 December, as was the case in March for the PEPP operation (see EUROPE 12450/6).
Mrs Lagarde has repeatedly referred to the “flexibility” of the PEPP operation to buy back massive amounts of mainly public securities, with a budget of €1,350 billion, which will continue until at least June 2021. This flexibility is apparent in the pace of purchases, the nature of the securities acquired, and the countries of issue.
The recalibration exercise, which the ECB’s services have been mandated to conduct, will also cover the asset purchase programme (APP) operations in the markets as well as targeted longer-term refinancing operations (TLTRO III).
On the economic front, after a real rebound this summer, the ECB is now expecting a sharp drop in economic activity in the euro area in November, whereas a gradual slowdown has already been evident since September. The service sector is particularly affected.
Inflation, which was negative in September and October, is expected to remain in negative territory until early 2021, Lagarde said. However, she refused to see this as a sign of deflation.
Finally, the ECB is reiterating the importance of continued budgetary support to cope with slowing economic activity, in parallel with monetary policy. It is calling on European officials to adopt and make operational “without delay” the Next Generation EU Recovery Plan, which, according to the Commission, will help to bring about “faster, stronger and more uniform” economic recovery. (Original version in French by Mathieu Bion)