The Governing Council would conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judged that the coronavirus crisis phase was over. Turning to euro area price developments, euro area annual HICP inflation had decreased from 0.4% in July to −0.2% in August (according to Eurostat’s flash estimate). Inflation had been persistently below levels consistent with the Governing Council’s inflation aim and inflation expectations remained close to their historical lows, amplifying risks to the anchoring of medium-term inflation expectations. 1. Review of financial, economic and monetary developments and policy options. As regards the external environment, members broadly shared the assessment provided by Mr Lane in his introduction. Euro area sovereign and corporate bond yield spreads had narrowed further, while equity prices, notwithstanding some weakening in bank stocks, had remained resilient overall on the back of favourable global risk sentiment and supportive monetary and fiscal policies. There was also a more determined approach to the crisis at the European level and the September baseline did not include the additional expenditure that could be expected from the NGEU programme. The data suggested a partial recovery in euro area business investment, even though firms were likely to cancel or postpone investment plans in an environment of heightened uncertainty, spare capacity and weaker balance sheets. Members agreed that the incoming data for the euro area since the finalisation of the June 2020 Eurosystem staff projections had been broadly in line with previous expectations. While temporary factors had distorted the August figure, underlying price pressures had likely weakened owing to subdued demand and significant labour market slack. It was recalled that a significant impact of the exchange rate appreciation on euro area inflation had been included in the September 2020 ECB staff projections. The outlook remained surrounded by high uncertainty and the balance of risks continued to be tilted to the downside. Recently, momentum had slowed in the services sector compared with the manufacturing sector, which was also visible in survey results for August. While the rebound in economic activity had resulted in some recovery in firms’ revenues and a shift in loan demand towards longer-term loans, the uncertainty over the economic outlook was likely to cast a shadow over future loan demand. 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Live blog: Mario Draghi’s monthly ECB press conference, Why the Fed Should Create a Standing Repo Facility. To do this, we use the anonymous data provided by cookies. Market-based indicators of longer-term inflation expectations had returned to their pre-pandemic levels, but the increase had been much smaller than in the United States and they still remained at very subdued levels. The risk of the severe scenario outlined in June had receded. This also included reiterating the continued determination of the Governing Council to use the PEPP in a flexible manner in order to address the possible threat of market fragmentation and to preserve the smooth transmission of monetary policy. Moreover, inflation had been persistently below levels consistent with the inflation aim and inflation expectations remained at subdued levels, which posed a risk to the perceived ability and determination of the ECB to deliver on its mandate. Survey data indicated that the perceived lack of demand was increasingly becoming a drag on investment – in particular business investment – in the second and third quarters of 2020. There were key downside risks to the medium-term outlook for price stability, mainly related to the as yet uncertain economic and financial implications of the pandemic. Recently, momentum had slowed in the services sector compared with the manufacturing sector, which was also visible in the survey results for August. Taking into account the foregoing discussion, upon a proposal by the President, the Governing Council took the following monetary policy decisions: The Governing Council continued to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner, in line with its commitment to symmetry. This pointed to the possibility of volatility or corrections in stock markets in the period ahead, as seen in US stock markets in the days preceding the September Governing Council meeting. It was argued that the severe scenario could not be entirely ruled out as there had been a new wave of infections, even if it had not so far been as lethal as the first wave. Many countries were now experiencing new outbreaks of the virus. Survey data indicated that the perceived lack of demand was increasingly becoming a drag on investment – in particular business investment – in the second and third quarters of 2020. The remark was made that the degree of uncertainty reflected in the gap at the end of the horizon between the level of GDP in the mild scenario and the level in the severe scenario was higher than in the June 2020 Eurosystem staff projections. Lingering uncertainty surrounding the fallout from the pandemic could have the effect of keeping household savings elevated for some time. In line with global activity, trade had also been recovering recently. Bank of Canada will maintain current level of policy rate until inflation objective is achieved, continues its quantitative easing program, Opening Statement before the House of Commons Standing Committee on Finance, Bank of Canada announces finalists for the sixth annual Governor’s Challenge, Taking the pulse of Canada’s financial system, Reminder: Changes to legal tender status will take effect in 2021, The Costs of Corporate Debt Overhang Following the COVID-19 Outbreak, Treasury Market When-Issued Trading Activity. In any case, the future roll-off of the PEPP portfolio would be managed to avoid interference with the appropriate monetary policy stance. It was underlined that uncertainty surrounding inflation was exceptionally high at present. While the incoming data since the last Governing Council meeting had been positive overall, suggesting a strong resumption of euro area activity broadly in line with previous expectations, risks continued to be tilted to the downside and the strength of the recovery remained surrounded by significant uncertainty. "ECB sees 2022 inflation at 1.3% (vs 1.3% seen in June)." While adverse financial amplification effects had to some extent been included in the September staff projections with regard to bank lending rates, the swift rebound in business investment foreseen in the baseline might appear optimistic, in part in view of the strong preference of firms for liquidity. It was suggested that the relative impact of negative shocks to demand and supply could be investigated in more depth by analysing sectoral developments. * Members not holding a voting right in September 2020 under Article 10.2 of the ESCB Statute. Reference was made to the language that had been used by the Governing Council on exchange rate volatility in 2017-18 and it was generally felt that the proposed communication was similar and appropriate at the current juncture. It has two types of meetings: a monetary policy meeting, held every six weeks, and a non-monetary policy meeting in which it discusses the other responsibilities of the ECB. While financial market conditions had continued to normalise since the July monetary policy meeting, with valuations of risky assets across the globe continuing to recover, the easing trend in financial conditions had been partly counteracted by the appreciation of the euro. It was stressed that the Governing Council had to be ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner. The euro had continued to appreciate against the US dollar (+3.8%) and in nominal effective terms (+1.7%) against a trade-weighted basket of 42 currencies. The meeting dates for 2020 are as follows. The ECB updated its forecasts at the September 10 meeting, with baseline forecasts for 2020 and 2021 GDP revised to -8.0% and +5.0% from -8.7% and +5.2% in June, respectively. "ECB sees 2020 inflation at 0.3% (vs 0.3% seen in June)." However, the recovery was asymmetric, being further advanced in the manufacturing sector than in the services sector. While the PEPP was currently seen as the primary instrument for providing additional monetary policy accommodation, it was noted that further cuts in policy rates and changes to the conditions of the TLTROs were also part of the toolkit for providing additional monetary policy accommodation, if necessary. On the basis of the current information, the PEPP envelope would likely have to be used in full to provide the necessary accommodation to offset the downward impact of the pandemic on the path of inflation, which was also in line with prevailing market expectations. The paths of both output and inflation would have been lower than foreseen in the September projections, had the ECB not recalibrated the pandemic emergency purchase programme (PEPP) in June. With regard to the monetary analysis, members broadly agreed with the assessment provided by Mr Lane in his introduction. The September ECB staff projections foresaw an increase in headline inflation from 0.3% in 2020 to 1.0% in 2021 and 1.3% in 2022. Reference was also made to the large stock of accumulated household savings, which could be drawn down more quickly than foreseen in the staff projections and underpin a rebound in consumption growth in the coming years. 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The members of the Governing Council subsequently finalised the introductory statement, which the President and the Vice-President would, as usual, deliver at the press conference following the end of the current Governing Council meeting. The situation in the labour market could be expected to lead to weaker wage pressures over time. Growth was foreseen to average −8.0%, 5.0% and 3.2% in 2020, 2021 and 2022 respectively. The projected inflation profile also reflected an increase in oil prices as embodied in futures markets, which depended on adherence to the recent agreement by OPEC to cut production. In conjunction with the ongoing asset purchases under the asset purchase programme (APP), the PEPP purchases were providing significant monetary stimulus, helping to re-anchor inflation to the path that had been projected before the outbreak of the pandemic. The Governing Council intended to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. In the near term the earlier collapse in oil prices and the temporary reduction in the VAT rate in Germany implied negative rates of euro area headline inflation for the rest of 2020. In this environment, the narrow monetary aggregate M1, encompassing the most liquid forms of money, continued to be the main contributor to broad money growth. Many countries were now experiencing new outbreaks of the virus. It was, however, cautioned that although low equity valuations in some sectors reflected investor expectations of an extended impact of the pandemic, overall stock prices still appeared to be highly valued, for example when looking at measures such as cyclically adjusted price-to-earnings ratios. Your email address will not be published. October 8, 2020 The speed of the rebound was broadly in line with the expected pace set out in the June 2020 projections. Inflation pressures were very low in some services sectors, and certain services sectors, such as hospitality, would probably experience a more gradual recovery than previously thought. Negative real yields also reduced the opportunity cost of holding a zero-coupon asset such as gold, which helped explain in part why gold prices had increased so strongly over the course of this year. Many market participants believed that this divergence – if it were to persist – would lower the risk of widespread lockdowns, resulting in less of a downside risk to economic activity. Survey-based measures generally remained at low levels. The September ECB staff projections foresaw an increase in headline inflation from 0.3% in 2020 to 1.0% in 2021 and 1.3% in 2022. The composite financing costs for non-financial firms (including the cost of bank borrowing) had continued to decrease. One important factor behind the rally in global risk assets was related to positive global macroeconomic surprises – as reflected in the Citigroup Economic Surprise Index for advanced economies, which stood at an all-time high. 23/01/2020 Press conference following the Governing Council meeting of the ECB in Frankfurt 19/02/2020 Governing Council of the ECB: non-monetary policy meeting in Frankfurt 12/03/2020 Press conference following the Governing Council meeting of the ECB in Frankfurt 01/04/2020 Governing Council of the ECB… ECB Press Releases, IMFBlog writes Chart of the WeekWhen Inequality is High, Pandemics Can Fuel Social Unrest, Amol Agrawal writes European banking’s moment of merger truth, Amol Agrawal writes The American Empire Across the Globe, Amol Agrawal writes Regional market integration and the emergence of a Scottish national grain market. On the basis of the current information, the PEPP envelope would likely have to be used in full to provide the necessary accommodation to offset the downward impact of the pandemic on the path of inflation, which was also in line with prevailing market expectations. Members widely agreed with the assessment presented by Mr Lane that ample stimulus remained necessary to support the economic recovery and to safeguard medium-term price stability. Browse the ECB’s reports, publications and research papers and filter them by date or activity. Idiosyncratic factors could partially explain these divergences. Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area - the world’s largest economy after the United States. It was also cautioned that sovereign exposures of banks had risen again since the start of the crisis, giving rise to renewed concerns about the tight nexus between banks and sovereigns. A second factor was the fall in equity risk premia that had contributed substantially to the rise in valuations in the United States. Fiscal measures taken in response to the pandemic emergency should as much as possible be targeted and temporary in nature. Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 9-10 September 2020. The ECB’s digital euro: anonymous or not? The unchanged projection for inflation in 2022 masked an upward revision to inflation excluding energy and food – in part reflecting the positive impact of the monetary and fiscal policy measures – which was largely offset by the revised path of energy prices. At the same time, it was highlighted that inflation expectations were still too low and that even though the risk of deflation was decreasing, it remained non-negligible. The Governing Council assembles twice a month in Frankfurt, Germany. In discussing recent developments in inflation expectations, members noted that longer-term inflation expectations, as reported in the ECB’s Survey of Professional Forecasters, had fallen to 1.6%, the lowest level since the start of Economic and Monetary Union. It was widely underlined that fiscal support was critical, should arrive as early as possible and should not be withdrawn too soon. Looking at inflation developments in recent months in more detail, energy inflation had continued to be a drag on euro area inflation, as oil prices were still at low levels, implying very negative year-on-year rates of energy inflation. In particular, in the absence of further regulatory relief regarding the classification of loans as non-performing, a surge in corporate insolvencies resulting from the pandemic could lead to an increase in non-performing loans on bank balance sheets, especially as governments were likely to start withdrawing some of the support provided, such as debt moratoria or loan guarantees. The euro nominal effective exchange rate had been on an upward trend since the crisis had struck, driven to a large extent by the euro’s appreciation against the US dollar. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00%, 0.25% and −0.50% respectively. In addition, risk sentiment had improved. Stress symptoms had largely dissipated and liquidity had returned to the market. In this context, NGEU funds were seen as important in helping to create a more level playing field, as the scope for national fiscal measures differed across countries. In particular, investors and forecasters had become more optimistic about the prospects for the early availability of a vaccine. High-yield bond spreads had even fallen by nearly 50 basis points. There was broad agreement among members that there was no room for complacency, as emphasised by Mr Lane in his introduction. The functioning of euro area financial markets had, by and large, been restored. While the appreciation to some extent reflected improvements in global risk sentiment, as well as euro area factors such as the NGEU recovery plan, it also reflected developments in monetary conditions in the euro area relative to the rest of the world. Against that background, members agreed with the proposal by Mr Lane to leave the overall monetary policy stance unchanged and to reconfirm the current configuration of existing monetary policy instruments. With regard to the monetary analysis, members broadly agreed with the assessment provided by Mr Lane in his introduction. These purchases would contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The September ECB staff macroeconomic projections signalled that output would rebound in the third and fourth quarters by 8.4% and 3.1% respectively. Be ready to act on ECB opportunities. Reproduction is permitted provided that the source is acknowledged. This assessment was also broadly reflected in the September 2020 ECB staff macroeconomic projections for the euro area. While, by and large, risks to global activity and trade remained on the downside, there were also some upside risks. Valuations of risky assets had continued to recover across the globe, driven by a combination of positive data surprises and strong policy actions. Mr Lane reviewed the global environment and recent economic and monetary developments in the euro area. The first and most important one was the substantial improvement in global risk sentiment, i.e. ... As it is also too early for a PEPP extension, the EUR should sail through the September ECB meeting. Reference was also made to the risk of debt deflation in the period ahead, given the increase in private and public sector indebtedness, and concern was expressed about possible “cliff effects” as fiscal and supervisory measures came to an end, with the risk of financial amplification associated with increasing insolvencies and higher non-performing loans, notably in the non-financial corporate sector. Your email address will not be published. Carsten Brzeski. At the same time, debt sustainability considerations meant that it was important for fiscal expansion to be temporary and well targeted, in particular aimed at improving productivity and sustainable economic growth. "ECB sees 2021 inflation at 1% (vs 0.8% seen in June)." The comment was made that inflation expectations appeared to have stabilised overall and, although uncertainty about the inflation outlook remained high, markets were beginning to price out the risk of deflation. While the pandemic was a common shock across euro area countries, references were made to the heterogeneity of developments in activity across countries, which could be attributed to differences in the evolution of the virus, to the containment measures and fiscal policy responses implemented in each country, and to the structure of each economy. On the whole, market expectations are for no change in policy at Thursday’s ECB announcement. Turning to financial conditions in the euro area, the EONIA forward curve remained slightly inverted, but there were no firm expectations of a cut in the deposit facility rate. Since the July monetary policy meeting the recovery in oil prices seemed to have stalled, with prices declining by 9.0% – driven by a combination of decelerating demand growth and higher supply. In this regard, the underlying dynamics of the pandemic, developments in negotiations on the post-transition Brexit arrangement, the outcome of the US presidential election and decisions on fiscal plans at the individual country level as well as at the euro area level had to be closely monitored. This included tracking the underlying dynamics of the pandemic, developments in negotiations on the post-transition Brexit arrangements and decisions on fiscal plans. Negative real yields also reduced the opportunity cost of holding a zero-coupon asset such as gold, which helped explain in part why gold prices had increased so strongly over the course of this year. A very very simple explanation of monetary policy. In this context, the risk of a further euro appreciation was seen as partly linked to market perceptions of the scope for further changes in monetary policy in different jurisdictions. It was, however, cautioned that although low equity valuations in some sectors reflected investor expectations of an extended impact of the pandemic, overall stock prices still appeared to be highly valued, for example when looking at measures such as cyclically adjusted price-to-earnings ratios. Alongside a resurgence of the virus, the winter months could be expected to be more challenging from a medical perspective. It was argued that the moderate improvement in inflation expectations was mostly due to the monetary policy decisions taken in June and that the prospect of a further appreciation of the exchange rate implied downside risks to inflation. One factor was the sectoral composition of stock markets as, despite the recent correction, the technology sector continued to benefit most from the pandemic. One factor that might explain the general resilience of financial markets was the growing divergence between the number of COVID-19 fatalities, which remained stable at low levels, and the number of new infections, which had more than tripled since the beginning of August 2020. Most of the adjustment in the labour market had stemmed from a decline in average hours worked, which mainly reflected the impact of job retention schemes. stress that the incoming information continued to signal a strong resumption of euro area economic activity, broadly in line with previous expectations, although the recovery remained incomplete, uneven and subject to considerable uncertainty; emphasise that inflation pressures were expected to remain subdued on account of weak demand, lower wage pressures and the appreciation of the euro exchange rate; note that the unchanged projection for headline inflation in 2022 masked an upward revision to core inflation (reflecting the positive impact of monetary and fiscal policies, albeit muted by the appreciation of the euro) that was offset by the revised path of energy price inflation; reiterate that ample monetary policy stimulus would remain necessary to support the economic recovery and to offset the negative impact of the pandemic shock on the projected path of inflation; highlight that, in the current environment of elevated uncertainty, significant economic slack and increased exchange rate volatility, the Governing Council would monitor incoming information very carefully and continue to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner. On the basis of current and futures prices for oil and taking into account the temporary reduction in the German VAT rate, euro area headline inflation was likely to remain negative over the coming months before turning positive again in early 2021. Moreover, in the near term price pressures were expected to remain subdued owing to weak demand, lower wage pressures and the appreciation of the euro exchange rate, despite some upward price pressures related to supply constraints. Finally, it needed to be highlighted that fiscal policy continued to be critical to support the recovery of the euro area economy and to provide important funding support to those hardest hit by the pandemic. Targeted structural policies were particularly important to revitalise euro area economies, with a focus on boosting investment in priority areas such as the green and digital transitions. Key figures and latest releases at a glance. On the interaction of gold and foreign exchange reserve returns, Capital treatment of securitisations of non-performing loans, Stablecoins: potential, risks and regulation, Housing booms, reallocation and productivity, Implications of Covid-19 for official statistics: a central banking perspective, Judy Shelton at the Bank of Canada? While the NGEU recovery plan was a positive development, uncertainty about the evolution of the ongoing COVID-19 pandemic and the potential materialisation of adverse real-financial feedback loops called for vigilance. It was underlined that the inflation and growth outlook would have been significantly worse had the Governing Council not taken its decisive action since the outbreak of the coronavirus crisis. In addition, risk sentiment had improved. 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