FRANKFURT (Reuters) – European Central Bank chief economist Philip Lane signalled a pause in policy action, arguing that a rebound is underway, markets have stabilized but that many months will be needed before there is clarity over the shape of the recovery.
Facing the biggest European recession in living memory due to the coronavirus pandemic, the ECB has already increased stimulus three times this year, providing unprecedented support for an economy that could shrink by close to a tenth in 2020 and take another two years just to get back to its pre-crisis level.
The ECB extended its emergency bond purchases until June 2021 and Lane said that while markets are already pricing in a further expansion of the scheme, the bank had given itself up to a year to reassess the situation.
“We’ve done a lot. We have essentially this one-year horizon,” Lane, a Dublin-born former university processor, told Reuters in an interview this week. “That one-year horizon reflects that, before we really know how able the European economy will be to recover from this shock.”
Lane added that the ECB’s intervention, including 1 trillion euros worth of loans to banks at negative rates and substantial purchases of commercial paper, had stabilised markets since March while banks remained “very liquid”.
Although recent economic indicators from industry surveys to inflation data have exceeded forecasts and positive data could come for a “long time”, Lane sought to temper expectations, arguing that a good bounce now says little about the broader recovery, which is likely to be interrupted from time to time.
WINTER SCENARIO UNCLEAR
“We’re in for a long period where the data should be mostly positive…(but) these weeks of the initial bounce don’t really provide a guide to what’s going to happen in the winter.”
Lane’s comments are in contrast to the views of Bank of England chief economist Andy Haldane, who said robust early data argued for a rapid, V-shaped recovery and reduced downside risks.
Lane, the architect of the ECB’s crisis-fighting measures, also appeared to play down expectations that the ECB will soon include sub-investment grade corporate bonds in its asset purchase programme, a topic discussed heavily among market analysts in the early phase of the crisis.
Few companies have lost their investment grade rating and, with the initial pandemic-related crunch over and many government guarantees put in place, Lane does not anticipate an imminent wave of downgrades.
“To me, current ratings look like a reasonable balance. The data are not compelling to say there should be a lot more downgrades.”
Although some are expecting euro zone inflation to turn negative in the coming months on increasing slack and crashing oil prices, Lane said his base case was for very low but positive readings on the back of fiscal and monetary expansion.
The ECB targets inflation at just under 2% in the medium-term but has missed this for seven consecutive years, despite record stimulus. Some argue that surging debt levels will make it impossible for the ECB to tighten policy in the future as any rise in borrowing costs would raise debt sustainability concerns in places like Italy – and threaten the euro itself.
Lane dismissed such arguments, saying this is not “unconditional truth” and high debt on its own does not prevent a rise in inflation, which is a key condition for the ECB to wind down stimulus.
“Our forward guidance is full of exit strategies. But what is true is the only real way to prove this is through action.”
Lane further said the ECB does not target any particular spread levels between the yield of euro zone members, and it is “absolutely not” into yield targeting.
To read the full transcript of the interview, please click on: [F9N2DF00G]
(Reporting by Balazs Koranyi; Editing by Mark Heinrich)