Funding costs for eurozone governments, households and businesses will remain “exceptionally favourable” until the economy recovers from the pandemic, European Central Bank President Christine Lagarde has said.
The ECB will use its emergency bond purchases and ultra-cheap loans to banks as its main means of controlling funding costs, it told the ECB’s annual central bank forum, which is held online for the first time this year.
ECB President hails ‘encouraging’ news of potential Covid-19 vaccine breakthrough which fueled a market rally this week but said the second wave of the pandemic still presented “new challenges and risks” for the eurozone economy.
“The main challenge for policymakers will be to close the gap until vaccination is well advanced and the recovery can build its own momentum,” said Lagarde. “The ECB was there for the first wave and the ECB will be there for the second wave.”
After his comments, the German 10-year Bund yield fell 2.5 basis points to minus 0.51%. Bond yields fall as their prices rise.
The recent resurgence of coronavirus infections in many European countries and the partial shutdowns imposed as a result could have an even greater impact on consumer and business confidence than during the first wave of the virus in the spring, she said. warned.
“Even if this second wave of the virus turns out to be less intense than the first, it still represents a danger to the economy,” she said. “In particular, if the public no longer sees the pandemic as a one-time event, we might see more lasting behavioral changes than in the first wave.”
Last month, the ECB said it would “recalibrate” all of its monetary policy instruments and announce the results next month, raising hopes that it will inject more stimulus to counter fears of a double dip recession in the economy.
On Wednesday, Ms Lagarde sent the clearest signal yet that the central bank would expand its Pandemic Emergency Purchase Program (PEPP), which has bought more than 640 billion euros in bonds, and its Targeted Longer-Term Refinancing Operations (TLTROs), which lent nearly €1.5 billion to banks at rates as low as minus 1%. Most analysts expect him to extend both until the end of next year, adding up to 500 billion euros to his 1.35 billion bond purchase plan. euros.
The ECB President said that “all options are on the table”, but the PEPP and the TLTRO had “proven their effectiveness in the current environment” and were “therefore likely to remain the main adjustment tools of our Monetary Policy”. This appears to rule out any further cuts to the ECB deposit rate, which is already at an all-time low of minus 0.5%.
Stressing the importance not only of the level of financing costs, but also of their duration, she said: “All sectors of the economy must be confident that financing conditions will remain exceptionally favorable for as long as necessary, especially more than the economic impact of the pandemic will now stretch into next year.
“Weak demand and the economic slowdown are weighing on inflation, which is likely to remain in negative territory for longer than previously thought,” she added.
Some critics have argued that central banks and governments risk creating “zombie” companies by keeping unviable companies alive. But Ms Lagarde said: ‘Concerns about ‘zombification’ or hampering creative destruction are misplaced, especially if a vaccine is now in sight.