MNI POLICY: Market Stress Reduces Rate Cut Impact-ECB's Lane

By Luke Heighton

     FRANKFURT (MNI) - Longer-term sovereign yields have become "virtually

unresponsive" to short-term interest rate cuts, European Central Bank chief

economist Philip Lane said Wednesday, making asset purchases a more effective

tool under the stressed market conditions caused by the Covid-19 crisis.

     "While we stand ready to cut policy rates in the future as market

conditions normalise and if warranted by the medium-term inflation outlook, this

evidence tilts the balance towards asset purchases as the more efficient tool in

current circumstances," Lane told a Financial Center Breakfast Webinar.

     Lane cautioned against placing too much confidence in recent data

suggesting a swift economic rebound as Europe slowly emerges from lockdown,

since the scale of the contraction had been "so large that overall activity will

remain far below the pre-crisis level and the scale of the initial rebound in

these weeks will not necessarily be a good guide to the speed and robustness of

the recovery."

     It may also take time to convince households and firms that the pandemic is

sufficiently under control and to restore economic confidence, he said.

     By the end of Q2 2021, Lane said, the ECB's total asset purchasing and

reinvestment policies are expected to have led to the withdrawal of substantial

duration risk from the market, in the order of 27% of the duration-equivalent

stock of outstanding public debt in the four largest euro area economies. This

would represent an increase of 8% from the end of 2019, he explained, once the

supply of bonds anticipated in the latest Eurosystem staff macroeconomic

projections is taken into account.

     The Pandemic Emergency Purchasing Programme and the expansion of the ECB's

original asset purchase programme should reduce the ten-year sovereign term

premium by almost 45 basis points, he added, complementing the "nearly 100 basis

point compression attributable to the stock of assets purchased under the APP in

recent years and the September 2019 recalibration of the APP."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,M$$EC$]