Blog ECB Review: Fiscal First and Foremost The European Central Bank (ECB) didn’t follow other major central banks and refrained from cutting interest rates in response to the coronavirus outbreak. This signals a shift in the central bank’s preferred policy tools – read more.
The European Central Bank (ECB) unveiled a package of monetary policy measures that while very much in line with our earlier views, fell short of expectations: markets roiled. The package included: An additional €120 billion of net asset purchases to be distributed over the rest of the year, with increased buying in the private sector - which currently includes covered bonds, corporate bonds and asset backed securities. This amount will be in addition to the currently open-ended €20 billion monthly net asset purchases. Additional Long-Term Refinancing Operations (LTROs) over the coming months to provide immediate liquidity support via banks to companies. Substantially more generous borrowing conditions for the existing Targeted-LTROs. This will include, amongst other easing measures, lowering the borrowing rate for banks to as low as the deposit facility rate minus 25 basis points, implying a cost not higher than -0.75%. Temporary capital relief for banks in reaction to the coronavirus, including allowing financial institutions full use of their own capital and liquidity buffers. The ECB left interest rates unchanged – a sign that there is little policy flexibility left in this tool since Eurozone interest rates are already at negative levels. We believe this decision was wise: while recent interest rate cuts by the U.S. Federal Reserve and Bank of England may have raised market expectations that the ECB would follow suit, we have long thought further policy rate reductions would only exacerbate what already is a challenging environment for banks and savers, while providing little benefit to borrowers. The ECB lowered its macroeconomic projections for the Eurozone, relative it its December forecasts, with the Governing Council viewing the risks firmly to the downside. President Christine Lagarde highlighted considerable uncertainty around the latest forecasts, given the ongoing market volatility. Lagarde called on all Eurozone member state governments and public sector institutions to deliver an ambitious and coordinated policy response, stressing that fiscal policy has to be “first and foremost”. Heading that call one day later, Germany’s government delivered a meaningful fiscal package. This supports our long-held view that the ECB’s interest rate policy has broadly reached its limits. We believe that the central bank will from now rely more on a combination of: Forward guidance to signal that policy rates will stay low for longer. Providing ample liquidity to the economy via the banking sector in the form of long-term refinancing operations; Asset purchases aimed at supporting fiscal policy for as long as necessary. Relying less on interest rates and more on asset purchases means that, like the Bank of Japan, the ECB has de facto subordinated monetary policy to elected government officials in charge of fiscal policy. In the current environment, there is a need for the central bank to support fiscal policy, rather than offsetting any fiscal stimulus, something that makes us expect a higher fiscal multiplier from any increased government expenditures. In line with the coordinated monetary and fiscal actions seen in other countries, such as Australia and the UK, it is important to recognise the differences between a single sovereign state and a monetary union such as the Eurozone. Coordinating fiscal policy in a union that lacks a single fiscal authority is more challenging than in a single state – and this partially explains some of the recent spread widening between Italian government bonds and those of other Eurozone countries. The markets are saying that Italy may not be able to ease its fiscal taps as much as it wants. While Lagarde did not address Italy specifically during her press conference, she later mentioned in a media appearance that the ECB would “be there” to help the country. This could be construed as either flexible deployment of the newly announced net asset purchases or a reference to the ECB’s Outright Monetary Transactions (OMT) policy, whereby the ECB buys member states’ government bonds to safeguard the singleness of monetary policy. Eurozone governments have to apply for OMT assistance, which is subject to conditionality. This process highlights the challenges of balancing fiscal and monetary policy within a structure in which the monetary union doesn’t have a fiscal match, and those running the fiscal coffers don’t have the monetary control. What seems clear is that this latest ECB move is a step more towards what we asked ourselves last year: is fiscal the new monetary? This blog was published on 13 March 2020. In these times of volatility and uncertainty, stay connected: follow PIMCO’s views on Investing in Uncertain Markets This blog was published on 13 March 2020.
Viewpoints Engaging With Stakeholders to Reduce Methane Emissions From Oil and Gas Production Methane emissions from oil and gas production have an outsized contribution to global warming that can be reduced in cost-effective ways, helping mitigate a significant transition risk.
Viewpoints Commodities’ Summer of Discontent: Limited Supply Flexibility Poses Material Risks Supply-side constraints on commodities pose risk to the global economy and elevate right tail risks to inflation.
Blog Assessing Inflation’s Effects Across Emerging Markets The varied responses of individual countries to global inflationary pressures have contributed to elevated real-rate differentials between developed and emerging markets.
Blog Power of Representation: the ‘Us’es’ To celebrate Pride Month, four PIMCO executives share their perspectives on inclusion and diversity in the workplace and the importance of visible representation.
Secular Outlook Reaching for Resilience Volatility, inflation, and geopolitical strain have countries and businesses focusing on defense. We argue for building resilience in portfolios in this fragmenting world, and delve into risks and opportunities we foresee over the next five years.
Blog Secular Outlook Key Takeaways: Reaching for Resilience We believe shorter business cycles, elevated volatility, and diminished policy responses warrant a focus on portfolio resilience over reaching for yield.
Viewpoints Active Versus Passive in Global Funds Active global bond funds distributed in Europe, Asia and Africa have outperformed their passive peers.
Blog Hazy Outlooks for Monetary Policy, Virus Roil Yield Curves and Boost Bonds Uncertainties that caused U.S. Treasuries to rally and yield curves to undulate in November may persist and could contribute to volatility into year-end.
Viewpoints European Secular Outlook: The Prospect of More Stability The COVID-19 crisis spurs cohesion, but fresh challenges await.
Blog SLR Expiration: Treasury Markets Likely to Shoulder the Costs The expiration of the temporary SLR changes should enhance the soundness of the banking system, but likely at the cost of Treasury market liquidity.