According to the ECB minutes, based on observations, overall inflation is now expected to remain in negative territory longer than forecast in September. Officials believe that the outbreak could have a more lasting impact on demand and supply, thereby reducing potential growth rates, and a double-dip recessionary scenario in the Eurozone cannot be ruled out. The ECB expects employment to shrink further, with a large number of jobs at risk, and inflation to remain at negative levels until early 2021.
Therefore, the central bank is expected to act more cautiously, with officials pointing out that the central bank should not pre-commit to specific policy actions and that the flexibility inherent in the PEPP is important, but that additional future purchases may not have the same impact as at present. ECB officials await a response from the fiscal side and will evaluate data including the outbreak and exchange rate.
According to the minutes of the meeting, the ECB agreed to take action in December, will wait for the results of the December economic forecasts, and will not tie itself down in terms of specific policies until December 10.
ECB Governing Council member Holtzman commented not long ago that PEPP has worked and spreads have been reduced; the ECB cannot rule out the implementation of new monetary policy tools, but lower deposit rates will not be effective, and the ECB will recalibrate the “tools that work”.
Riccardo Fraccaro, a senior adviser to Italian Prime Minister Antonio Conte, said Thursday that government bonds bought during the New Canaan crisis should be exempted or held in perpetuity to help countries recover and rebuild their economies, according to foreign media reports. “Monetary policy must support the expansionary fiscal policies of member countries in every possible way.”
Fraccaro has also proposed a “green rule” that would exclude public spending related to environmental investments from deficit calculations. But Fraccaro’s call for debt relief will not be welcomed by the ECB, the report said.
The ECB has repeatedly stated that they will not use debt cancellation as a form of monetary financing, calling Fraccaro’s request unreasonable.
It is widely expected that the ECB will further expand the unprecedented series of stimulus measures it has introduced this year at its December rate meeting in response to the economic and financial impact of the contagion. Institutions commented that during the first wave of the contagion in March, investors believed that the ECB’s initial actions were too cautious to prevent an accelerated market collapse. Policymakers appear to have learned that lesson at their Oct. 29 meeting, as they are increasingly concerned that a second recession could cause permanent damage to the economy.
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