The European Central Bank (ECB) is ready to expand any of its instruments if it judges that the medium-term inflation outlook has worsened, executive board member Isabel Schnabel said.
“If we judge that further stimulus is needed, the ECB will be ready to expand any of its tools in order to achieve its price stability objective,” Schnabel said in an interview with the Financial Times published on the bank’s Web site yesterday. “With respect to the Pandemic Emergency Purchase Program, this concerns the size, but also the composition and the duration of the program. We are ready to react to new data coming in.”
The ECB Governing Council is seen as increasingly likely to increase the size of its 750 billion euro (US$822.7 billion) emergency asset purchase program when it meets next week.
Photo: Reuters
Officials have debated the need to remove a constraint on its bond buying that ties purchases to the size of the euro’s constituent economies.
Schnabel, a German national, said the ECB was not adjusting its monetary policy in response to a recent German constitutional court ruling against a previous bond-buying program.
She added that she did not think the Bundesbank would be forced to stop participating in the program.
“We are in a monetary union, and Germany and the Bundesbank are an important part of that,” she said. “We have to avoid a situation in which one national central bank cannot participate in our asset purchase programs.”
The ECB has a duty to counter a rapid divergence in bond spreads of euro member countries if they point toward market dysfunction, she said.
That does not mean the ECB targets specific spreads for those countries, she said.
“If we see that there is an unwarranted tightening of financial conditions that is not consistent with our price stability objective, the ECB will react,” she said. “You can, for example, look at the funding conditions for corporates or liquidity indicators. Most of them have gone down quite substantially in response to our policy measures, but they are still elevated compared to the pre-crisis period. This shows that we are still not in a stable situation and that we have to continue to act forcefully.”
The eurozone economy is likely to shrink between 8 and 12 percent this year as it struggles to overcome the impact of the COVID-19 pandemic, ECB President Christine Lagarde said yesterday.
The ECB earlier said the economy could shrink between 5 and 12 percent, but speaking in a youth dialogue, Lagarde said that the “mild” scenario is already outdated and the actual outcome would be between the “medium and “severe” scenarios.
Additional reporting by Reuters
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