The European Central Bank (ECB) presented its monetary policy decision yesterday. It was the highlight event of the week, overshadowed, though, by the new fiscal stimulus package announced earlier in the week in the United States.
The bar was set high for the ECB. Earlier in the year, some members of the ECB hinted that the central bank would ease some more in response to the unwanted tightening conditions from the higher long-term yields imported from the United States.
Right from the bat, the central bank announced that it would increase the purchases under the PEPP program significantly. The announcement came forty-five minutes until the press conference, and the ECB made quite an entry. The euro did not react because the press conference is always more important than the actual announcement. It is here, where the ECB sounded uncertain, ambiguous, and delivered, yet again, a dubious message.
Preserving Favorable Financing Conditions – The New ECB’s Goal
The press conference started very well, with Christine Lagarde, the ECB President, reading the Governing Council statement. Also, she presented the new data from the economic staff regarding future growth and inflation – a balanced outlook, one might say, considering the challenges ahead (e.g., the pandemic, inflationary threats, economic recovery).
It all went well for the ECB until the first question from the press. Asked what “significant” purchases means, the ECB President failed to give a proper answer. She hesitated again, avoided the question, and left it unanswered. In other words, we do not know what “significant” means, we only know that the ECB will start buying more even from the next Monday.
She followed up with an explanation of why the ECB is easing – in order to maintain “favorable financing conditions”. However, when trying to explain the concept, which is the cornerstone of the ECB’s stance right now, Lagarde did not sound convincing again.
Just like that, instead of improving its communication, as very much needed and expected, the ECB made it worse. First, there is no clarity about the size of the future purchasing. Second, the explanation of the new “holistic” approach of the ECB resembles anything but a decisive Governing Council ready to act now. Finally, the ECB keeps giving the impression that it lags the dynamics seen in the United States.
Asked why the ECB did not increase the purchases earlier, the answer from Lagarde was that they wanted to wait for more data from the staff. This is the correct answer, indeed, with one huge problem – this is a pandemic, an emergency situation, and the ECB looks complacent, to say the least.