The European Central Bank will decide how much to spend on its emergency bond-buying programme by checking if bank lending rates, corporate credit conditions and government bond yields are favourable enough to boost demand and inflation.
The new details about how the ECB defines its recently added objective of “favourable financing conditions” were set out by its president Christine Lagarde on Thursday after the central bank left its main stimulus policies and interest rates unchanged.
The announcement came six weeks after the ECB expanded its emergency bond-buying programme to €1.85tn and extended it well into next year in response to a resurgence of coronavirus infections in the eurozone that is expected to drag the bloc into a double-dip recession this winter.
The ECB said on Thursday it had “decided to reconfirm its very accommodative monetary policy stance” after it judged the risks for the eurozone outlook to be “tilted to the downside but less pronounced”.
Explaining the shift in the policy stance that it announced last month, it added that emergency bond purchases would be “conducted to preserve favourable financing conditions over the pandemic period” and the €1.85tn may not be used in full or could be increased further if needed. The purchases have helped to drive borrowing costs for governments, businesses and households down to record lows.
Ms Lagarde stressed the flexibility of the ECB’s strategy and said it would take a “holistic and multi-faceted” approach, including tracking the cost and availability of financing for households, businesses and governments.
Eurozone government bonds and shares fell after the ECB policy announcement, while the euro rose on fears it could reduce its monthly bond purchases.
Analysts called for the ECB to give more detail on how it defined “favourable financing conditions”.
Some claim the policy amounts to an informal strategy of yield curve control — a commitment to buy as many bonds as needed to keep sovereign yields at a certain level, which has been embraced by central banks in Japan and Australia.
“According to Ms Lagarde, the assessment of financing conditions was not driven by a single indicator, but by a holistic approach, including bank lending, credit conditions, sovereign and corporate yields. Are you any smarter? We're not,” said Carsten Brzeski, global head of macro research at ING.
Frederik Ducrozet, strategist at Pictet Wealth Management, said: “Why make it so complicated? Constructive ambiguity can be a good thing, until it is no longer constructive.”
The ECB’s policy aimed to prevent “a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”, Ms Lagarde said, warning of “downside risks to the short-term economic outlook” after several countries imposed stricter lockdowns.
She added that “a decline [in output] in the fourth quarter will travel into the first quarter” — making a recession likely — but the ECB’s eurozone growth forecast this year of 3.9 per cent was “still broadly valid”.
Eurozone inflation was negative in December for the fifth consecutive month and economists doubt the ECB’s ability to reach its target for price growth of just below 2 per cent — something it has failed to do for most of the past decade. The euro’s recent rise against the US dollar to its highest level for almost three years is weighing on prices by lowering the cost of imports.
“Underlying price pressures are expected to remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate,” Ms Lagarde said, adding that market-based inflation expectations had increased slightly but remained low.
Konstantin Veit, senior portfolio manager at Pimco, said: “The ECB remains on autopilot and, absent zombie apocalypse, we don’t expect any material monetary policy decision from the ECB during the first half of the year.”
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