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MNI (London)
By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank's monetary policy will not
change in response to the German Constitutional Court's ruling against the
Public Sector Purchase Programme, Executive Board member Isabel Schnabel said in
an interview with the Financial Times published Wednesday
     The Governing Council is likely to use staff inflation forecasts due to be
unveiled at the June 4 meeting to help decide whether an increase in the size
and composition of the newer Pandemic Emergency Purchase Programme is required,
she added.
     Schnabel also ventured into the area of euro area government bond yield
spreads, saying the ECB was watching spreads closely and would move to act if a
widening of spreads lead to a market dysfunction.
     Here are the key points from the interview with the Financial Times.
     - The ECB is not adjusting its monetary policy "in any way" in response to
the May 5 court ruling, Schnabel said, noting the bank has shown repeatedly that
it takes into account the proportionality of its monetary policy actions,
including those relating to PSPP. Asked whether the ECB could find itself
conducting PSPP operations without the participation of the Bundesbank, Schnabel
replied: "That is not going to happen."
     - The ECB is "not targeting spreads, but we are watching them carefully."
"A very quick divergence in sovereign spreads poses risks of fragmentation that
may threaten the transmission of monetary policy to all parts of the euro area.
If we see such signs of fragmentation, we have to react. That doesn't mean that
in the end all spreads relative to the German Bund will be equal to zero - and
they shouldn't be, given different fundamentals. But a quick divergence of
spreads points towards market dysfunction with risks of running into
self-reinforcing spirals. The ECB certainly has to counter such developments."
     - The June 4 Governing Council meeting could result in a change to the size
or composition of PEPP, Schnabel indicated, the evolution of the medium-term
outlook a key element in the decision-making process. "If we see that the
situation has deteriorated," she said, "and 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. With respect to the PEPP, this concerns the size but
also the composition and the duration of the programme. We are ready to react to
new data coming in."
     - The euro zone will experience deflationary forces in the short-run,
Schnabel said, but the picture was less clear in the longer-run. "My main
concern, she added, "is disintegration, which would be very harmful. "We have to
avoid an increasing divergence within the euro area," she said.
     - "From a purely economic perspective," Schnabel said, "it is clear that
this asymmetry has to be countered by an appropriate policy response. Economic
divergence across the euro area would be "highly problematic" for the ECB, she
added. "This is not just about giving more loans, which risks exacerbating
divergence. We need transfers to those countries that are hit hardest."
     - "A safe European asset would certainly help integration and would also
foster the international role of the euro," Schnabel said. "These are the main
things we should focus on and we should not allow the European economy to
disintegrate in any way."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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