The officials of the European Central Bank They estimate that there are compelling reasons to remain calm and not rush to expand the emergency stimulus despite the sharp slowdown in the economy and the increase in coronavirus cases.
While the surge in new cases means there will be new social restrictions and an impact on activity, there is little interest among most lawmakers to expand bond buying again at this month’s meeting, people involved in the deliberations said. . They asked not to be named due to the confidentiality of the discussions.
That reinforces the idea that such a decision will most likely be made in December, in part because the Governing Council will receive new projections for growth and inflation and will have more time to assess the economic damage. The US elections will have taken place and the uncertainty about Europe’s fiscal stimulus package and Brexit could have also dissipated.
Securing unanimous support to boost the stimulus would also be easier in December, according to a euro zone official. It is an important consideration for the president, Christine Lagarde, who has emphasized the need to build consensus around political decisions, after inheriting a divided council from her predecessor Mario Draghi.
An ECB spokesman declined to comment.
Some officials, including the president of the central bank of the Netherlands, Klaas Knot, they have argued that they want more information before making a decision. That suggests that pushing for an expansion in October would present the risk of a split in the Governing Council that could mitigate the impact on the market, effectively undermining political action.
Whatever the outcome, the decision will be a major test of Lagarde’s ability to bring together divergent views after a show of unity among officials during the height of the pandemic.
“With Draghi, they may have already pushed for the measure, but with Lagarde, the ECB is more consensual “said Nick Kounis, head of macroeconomic research at ABN Amro NV in Amsterdam. “You need to wait for more information to better gauge your response, and if you have a split, it takes time to reach consensus, so I don’t think Lagarde is the one to push the action yet.”
Economists expect the ECB to increase its emergency purchase program of 1.35 trillion euros (US $ 1.6 trillion) before the end of the year. It is currently scheduled to run through mid-2021, and with less than half the money spent, there is also no immediate reason to rush, as Vice President Luis de Guindos argued this week.
“We will have new projections in December and we will reassess how convenient and appropriate the package is based on the new projections,” he said.
However, chief economist Philip Lane put the October session of the ECB on the line when he argued that the Governing Council will decide “meeting by meeting” if action is needed.
His colleague Fabio Panetta has raised concerns about the price outlook and argued that the ECB should err on the side of giving too much stimulus. The inflation rate in the euro area is below zero and will likely remain there for the rest of the year.
Policymakers in the region’s two largest economies have asked for patience for now.
Bundesbank President Jens Weidmann cautioned against preventive decisions that have not been made due to the expectations such talk generates. For the governor of the French central bank, Francois Villeroy de Galhau, the “current very accommodative monetary stance is appropriate.”
“But having firm hands does not mean having them tied: we have our hands free for the future and we will be ready to continue acting if necessary,” Villeroy said this week.