MNI POLICY: Meeting Account Shows ECB Ready To Boost Purchases

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank is prepared to expand its bond

purchases if necessary, its Apr. 28-29 account showed, even though Governing

Council members did not unanimously support the measures announced at the

meeting.

     "It was underlined that past experience showed that a loss of confidence in

financial markets had to be avoided and pre-emptive action was preferable," the

account showed.

     Members commented it was "too early to conclude that the "severe" scenario

presented by ECB staff, for a 12% decline in GDP, was the most likely," amid

general agreement that the availability of new eurosystem staff macroeconomic

projections in June would be an appropriate point to adjust the pandemic

emergency purchasing programme and other instruments if needed.

     "It was generally considered that [...] the "mild" scenario was probably

already too optimistic." This showed GDP falling by about 5%. A medium scenario

foresaw an 8% contraction.

     The gathering of 19 central bank bosses "broadly" backed the decision to

introduce new pandemic emergency longer-term refinancing operations.

     The June projections were very likely be revised down significantly

compared with the March 2020 ECB staff projections, members said. A swift

V-shaped recovery could "probably already be ruled out," though some improvement

owing to a relaxation of containment measures was expected in May, following a

large shock in April.

     The economic effects of the pandemic are likely to continue for a "

considerable period" after the coronavirus has been contained, council members

added, with recovery slow.

     There was widespread agreement that the short-term outlook for inflation

should be revised down, but there were differing opinions on the medium- to

long-term outlook. One council member pointed to a "significant risk of

deflation or very low inflation in the coming years."

     Concerns about banks' non-performing loans, public debt and the nexus

between banks and sovereigns were prominent in discussions, though it was

suggested that "the probability of such risks occurring would depend on the

strength of the recovery in 2021." Further discussion was also needed about the

differing extent of the downturn in individual eurozone countries.

     The impact of the pandemic on foreign trade, including the effect of

changes in the future structure of global production, was mentioned, alongside

risks surrounding emerging market economies.

     One council member expressed concern that lowering the minimum rate in

TLTRO III to 50 basis points below the deposit facility rate could permit banks

to obtain funds in the operations and then deposit them at the deposit facility

rate instead of increasing lending to the private sector.

--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$]