The European Central Bank (ECB) may be forced to enact further extraordinary measures to lift inflation toward its target following the shock of the coronavirus, according to the ECB’s chief economist, Philip Lane, Thursday.
“For the ECB to deliver on its mandate [the Bank may resort] to additional monetary stimulus,” Lane told the Kansas City Federal Reserve Symposium, taking place virtually this year, rather than at its usual location in Jackson Hole, Wyoming.
Those comments suggested a more dovish stance than the ECB’s repeated commitment to “adjust all of its instruments, as appropriate”, a phrase reiterated by Lane on Thursday.
The ECB aims to maintain consumer price inflation at close to but below an annual rate of 2.0%, but has failed to meet that target since 2013. Inflation slipped as low as 0.3% in June before edging up slightly to 0.4% last month.
However, Lane stressed the effectiveness of monetary measures already implemented in the face of the Covid-induced economic slump, notably the €1.35 trillion Pandemic Emergency Purchase Programme, which is due to run until at least the end of June 2021. The Bank has also launched targeted long-term refinancing operations, allowing banks to obtain liquidity at sub-zero interest rates.
“Since its announcement in March, the PEPP has acted as a powerful market-stabilising force,” said Lane, noting the narrowing of sovereign bond yields between Germany and more fiscally challenged nations to the south of the bloc.
Those programmes, along with fiscal measures taken at EU and national level, will lift output by a cumulative 1.3 percentage points between 2020 and 2022, and boost inflation by 0.8 percentage point over the same period, said Lane.
However, further monetary measures will “depend on the extent” of Eurozone fiscal support, Lane added. Eurozone leaders overcame historical apathy toward pooled debt last month, agreeing a €750 billion plan of grants and loans for stricken nations in the bloc.
Lane also stressed that the ECB will draw on its most recent firefighting in conducting its current review of monetary policy. The chief economist did not reveal the timing of the review, but Eurozone economists expect an update as early as next month.