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ECB Easing During the Coronavirus Pandemic

Posted: Tuesday, September 8th, 2020

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Two days ahead of the ECB September 2020 meeting, it is a good time to review the ECB easing measures taken so far in the pandemic. The ECB was one of the first central banks to react to the exogenous shock coming from the virus. However, the Euro strength reveals difficulties in the easing measures transmission mechanism.

As such, the EURUSD trades close to 1.20 ahead of the ECB meeting. Moreover, the EURGBP and the EURJPY trade close to recent highs. Pronounced EUR strength puts pressure on inflation and leaves the impression that the ECB easing is not enough.

ECB Easing

ECB Easing Measures – A Quick Review

Back in March 2020, when the stock market tanked, and the world looked for safety in the world’s reserve currency, the ECB extended its Asset Purchase Program (APP) by EUR120 billion in 2020. Moreover, it made NFC commercial paper eligible.

Still, in March, the conditions for the TLTRO’s operations were eased further. This time, the ECB went so far that for one year, from June 2020 to June 2021, it set the borrowing rate into the negative territory. In other words – free money from the ECB. Also, the Pandemic Emergency Purchase Programme (PEPP) was launched, having a EUR750 billion envelope until December 2020.

The same month, the ECB activated swap lines with Denmark (in EUR) and with the United States (in USD). The effect was that the USD liquidity improved, and the financial system strengthened almost overnight.

In April, new swap lines were activated with Croatia and Bulgaria. Moreover, the TLTRO’s conditions eased even more, with interest dropping even more below zero. Furthermore, the central bank launched the so-called PELTRO (Pandemic Emergency Longer-Term Operations), with interest rates of -0.25%.

Two months later, the ECB extended the PEPP program until at least June 2021. Also, it vowed to reinvest the proceeds until the end of 2022. All this time, it offered guidance against dividend payments, about liquidity buffers, and it even offered a temporary reduction in capital requirement for market risk.

Financial Conditions in the Euro Area Remain Tight

Yet, despite all its efforts, financial conditions in the Euro area remain tight. More precisely, tighter than in the United States.

One explanation comes from the fact that the Fed had room to maneuver on the federal funds rate. By slashing it to zero from above 2%, the easing measure quickly impacted the financial conditions.

In sharp contrast, the ECB already had the deposit facility rate below zero for several years before the coronavirus pandemic. Hence, the ECB easing pales in contrast with what the Fed already did, despite ECB’s efforts.

Perhaps it is time for the ECB to reinvent itself at the September meeting. In times of a crisis, central banks innovate so as to better fill their mandate. For the ECB to deliver on its price stability mandate, it cannot tolerate core inflation as low as 0.4%, as we saw last week.

Hence, if there is a time for the ECB to innovate to deliver further easing, this is the one.

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