Policymakers are ready to boost stimulus measures as early as June after the coronavirus, or Covid-19, pandemic hurt the euro area economy severely and cast a pall over the near term outlook, minutes of the April 29-30 policy session signaled Friday.
“Looking ahead, and in the light of the high uncertainty surrounding the economic and inflation outlook as shown in the scenarios prepared by ECB staff, it was stressed that the ECB needed to stand ready to adjust its monetary policy stance as appropriate and also to ensure the functioning of transmission across the euro area,” the minutes, which the ECB calls ‘account’ revealed. The Pandemic Emergency Purchase Programme, or PEPP, worth EUR 750 billion that the ECB announced in March to support the euro area economy was essential and limited the likelihood of a “self-reinforcing downward spiral”, the minutes said. The Governing Council “was fully prepared to increase the size of the PEPP and adjust its composition, and potentially its other instruments, if, in the light of information that became available before its June meeting, it judged that the scale of the stimulus was falling short of what was needed,” the minutes said.
Markets may construe this stance as a strong signal that the bank is ready to boost stimulus to support the euro area economy in its June meeting. “Sure, they could wait until September, when hopefully the real shape of the recovery will have materialized,” ING economist Carsten Brzeski said. “However, the fact that – at least at its current pace – the PEPP would be pretty empty by October could quickly lead to unwarranted speculations in financial markets.”
However, the latest ruling from the German Constitutional Court that asked ECB to explain its EUR 2.1 trillion worth government debt purchases since 2015 has complicated the picture. Though it is expected that the ruling will not affect the PEPP for now, it will force the ECB to think hard before deciding on future asset purchases. “The court’s ruling could actually motivate the ECB to increase the size of the PEPP while the Eurozone is still in the middle of coping with the pandemic and not once the worst might already be behind,” Brzeski added. Latest data from Eurostat showed that the Eurozone economy shrunk at a record pace of 3.8 percent in the first quarter and economists are looking forward to much worse figures for the second quarter that saw a major part of the Covid-19 impact.
The worst case scenario projected by the ECB show a 12 percent contraction for the euro area this year and some policymakers have already suggested this may be realistic. The ECB Staff is set to present its latest macroeconomic projections in the June policy session. “As demand was considered likely to recover only gradually, a swift V-shaped recovery could probably already be ruled out at this stage,” the minutes said. Further, the minutes said policymakers largely were of the view that of the three scenarios presented, the “mild” scenario, which sees a contraction of around 5 percent, was probably already too optimistic.
“At the same time, the comment was made that it was too early to conclude that the “severe” scenario presented by ECB staff was the most likely,” the minutes said. ECB Chief Economist Philip Lane has said that the economy will not return to pre-crisis level at least until 2021. In April, the bank strengthened its non-conventional stimulus measures, but left interest rates unchanged. The next policy announcement is scheduled for June 4.