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ECB’s Schnabel warns against blockbuster stimulus

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Warning: Isabel Schnabel believes the pandemic could last longer than expected. Photo: Alex Kraus/Bloomberg

Warning: Isabel Schnabel believes the pandemic could last longer than expected. Photo: Alex Kraus/Bloomberg

Warning: Isabel Schnabel believes the pandemic could last longer than expected. Photo: Alex Kraus/Bloomberg

The European Central Bank (ECB) should focus on keeping financial conditions at current levels through the crisis rather than announcing a blockbuster stimulus package that beats market expectations, according to Executive Board member Isabel Schnabel.

Just over a week before the ECB Governing Council's policy decision, Ms Schnabel confirmed that more support is likely because the pandemic will be more protracted than expected.

"This has to be reflected in our policy decisions," she said in an interview on Monday.

But she also noted that borrowing costs have dropped to record lows because of monetary and fiscal aid, and what’s most important is sustaining that state of affairs until the crisis is past.

"It is appropriate to focus on preserving these conditions rather than easing much further," she said. "If it's necessary to do something that doesn't meet market expectations, we have to do that nevertheless."

Economists predict the ECB will expand its €1.35trn pandemic bond-buying program by around €500bn, extend it by at least six months to the end of next year, and offer more long-term loans to banks. Societe Generale and Commerzbank both predict an extra €600bn of purchases.

President Christine Lagarde and her colleagues have said those tools will be key to their December 10 decision, with a cut in the deposit rate from the current -0.5pc less likely.

Ms Schnabel's comments suggest she'll argue for staying within such expectations on size, but stretching the duration out further.

Asked if she'd back a 12-month extension of bond purchases until mid-2022, she replied that it is one option that will be considered.

She also signaled openness to extending the window – currently June 2020 to June 2021 – during which banks can access the "extremely favorable" interest rate of -1pc on long-term loans. While not ruling out cutting that rate, she expressed reservations.

"There is no technical reason why this could not be lowered," she said. "The question is whether this is considered appropriate."

As a member of the ECB's six-member board, Ms Schnabel will have a hand in making next week's policy proposal. Some of her colleagues on the decision-making Governing Council may push for a bigger bond-buying programme though, and the International Monetary Fund said on Monday that the central bank should consider all options, including cutting interest rates again.
This pandemic caused the deepest peacetime recession in a century, and now a second wave of coronavirus infections has forced governments to impose new lockdowns that will likely push the economy into another contraction.

While progress is being made on vaccines, Ms Schnabel said central banks and governments will be dealing with the economic scars for some time to come.

She urged politicians not to end their fiscal support prematurely, and said it's "absolutely crucial" that European Union members reach agreement on their joint spending package as soon as possible. That €1.8trn plan is being held up by Poland and Hungary, who object to disbursements being linked to democratic standards.

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Ms Schnabel was also unwilling to predict whether the ECB's action next week will be its last burst of stimulus before the pandemic ends, or whether she will ever see monetary policy tightened before her term on the board concludes at the end of 2028.
"I indeed hope this will be the last big push, but we cannever know what's going to happen," she said. "There is a positive scenario where we get a swift recovery and the scarring is relatively limited. But there is also the risk of the crisis being more protracted."


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