The ECB's policy response to the COVID-19 pandemic - Isabel Schnabel Member of the ECB Executive Board
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The ECB’s policy
response to the
COVID-19 pandemic
University of Chicago Booth School
of Business, 18 February 2021
Isabel Schnabel
Member of the ECB Executive Board
www.ecb.europa.eu ©Severe economic slump with long-lasting effects
Current Eurosystem staff projections
Real GDP HICP inflation
(index: Q4 2019 = 100) (year-on-year change, %)
December 2020 Eurosystem staff projections - range December 2020 Eurosystem staff projections - range
December 2020 Eurosystem staff projections December 2020 Eurosystem staff projections
Realised GDP Realised HICP
March 2020 ECB staff projections Realised HICP (Jan-21)
110 March 2020 ECB staff projections
2.0
105
1.6
2.0
100
1.2 1.6
95 1.2
0.8 0.8
90 0.4
0.4
0.0
85 0.0 -0.4
2019 2020 2021 2022
80 -0.4
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Source: ECB. Source: ECB.
Notes: The area shaded in grey indicates the range of staff projections covering a milder and a more Notes: The area shaded in grey indicates the range of staff projections covering a milder and a more
severe impact of the crisis. severe impact of the crisis.
Latest observation: Q4 2020 for realised GDP data, Q3 2020 for Eurosystem staff projections published Latest observation: Q4 2020 for quarterly data, January 2021 for monthly data (diamond).
in December 2020.
2 www.ecb.europa.eu ©Sharp expansion of ECB balance sheet due to measures
in response to the pandemic
Evolution of ECB balance sheet (€ billion)
MRO LTRO TLTRO Public
Public APP
APP (PSPP,
(PSPP) SMP)
+ (SMP) Private APP (CSPP, CBPP3, ABSPP) PEPP
6,000 6,000
Corona
5,000 outbreak 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0
2007 2009 2011 2013 2015 2017 2019 2021
Source: ECB, ECB calculations.
Latest observation: 15 February 2021.
3 www.ecb.europa.eu ©Timeline of ECB monetary policy measures during the pandemic
Asset Purchase Programme (APP) Pandemic Emergency Purchase Programme (PEPP) Lending facilities1 Swap/repo lines2
Mar. 2020 Apr. 2020 Jun. 2020 Jul/Aug. 2020 Dec. 2020
APP expansion3 PELTROs introduced PEPP expansion New repo lines with central bank of PEPP expansion
• Extended by €120 billion in 2020 • 7 operations maturing by Sep. 2021 • Increase of envelope by €600 billion to a Hungary and other non-EU countries in • Increase of envelope by €500 billion to a
• In addition to ongoing purchases of €20 • Interest rate 25 bps below MRO total envelope of €1,350 billion South & East Europe total envelope of €1,850 billion
billion per month/reinvestments • Extension by 6 months until Jun. 2021 • Extension until Mar. 2022
• Reinvestments until Dec. 2022 • Reinvestments until Dec. 2023
Further easing of TLTRO III conditions Frequency of 7-day operations in US
PEPP introduction • Interest rate lowered by further 25 bps dollar reduced to one per week
• €750 billion until Dec. 2020 for banks meeting lending threshold Repo facility Four additional PELTROs in 2021
• Purchases include all APP-eligible asset • Set-up of new Eurosystem repo facility • Facility to be used as liquidity backstop
categories, eligibility waiver applied to to provide euro liquidity to non-euro
Greek sovereign debt Temporary easing of collateral area central banks (EUREP)
requirements • Repo line with central bank of Romania Recalibration of TLTRO III conditions
• Mitigation of impact of rating changes • Most favourable borrowing rate
Bridge LTROs • Reduction of haircuts extended until June 2022
• Maturing in Jun. 2020 • Wider eligibility of credit claims Frequency of 7-day operations in US • 3 additional operations in 2021
• Fixed rate (DFR) and full allotment • Eligibility of Greek sovereign debt dollar reduced to three per week • Borrowing entitlement increased to 55%
of eligible loans
TLTRO III recalibration New swap lines with central banks of
• Rate as low as 25 bps4 below DFR for Bulgaria and Croatia Collateral requirements
banks meeting lending threshold • Extended until June 2022
• Continuation of fixed rate full allotment
procedures
Swap line reactivated with central bank
of Denmark
EUREP, swap/repo lines with non-euro
area central banks extended until
Swap lines in US dollar reactivated with Mar. 2022
Fed. Reserve/other major central banks:
• Daily 7-day and weekly 84-day
operations
• Pricing reduced by 25 bps
Source: ECB.
Notes:
1. LTROs and PELTROs refer to the longer-term refinancing operations and pandemic emergency longer-term refinancing operations, respectively. TLTROs stands for targeted longer-term refinancing operations.
2. Under a repo line, the ECB provides euro liquidity to a non-euro area central bank in exchange for adequate euro-denominated collateral.
3. The ECB reconfirmed its forward guidance on the path of policy interest rates and the APP throughout this period.The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation
outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
4. The term "bps" stands for "basis points".
4 www.ecb.europa.eu ©PEPP introduced as response to the pandemic, with flexibility of purchases
over time, across asset classes and among jurisdictions
PEPP monthly net purchases and net purchases by PEPP cumulative net purchases
asset class (€ billion) (€ billion)
140 Commercial paper 900
Corporate bonds December
Covered bonds 800 2020
120 Public sector securities Envelope
June 2020
260 700 Envelope increased to
100 increased to €1,850 bn
600 €1,350 bn
80 500
170 March 2020
400 Envelope set
60 at €750 bn
300
40
80 200
20 100
0 0
-10 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Mar-20 Jun-20 Sep-20 Dec-20 Mar- Jun- Aug- Oct- Dec- Source: ECB.
Source: ECB. May Jul Sep Nov Jan Note: Cumulative monthly net purchase figures represent the difference between the acquisition cost of
Latest observation: January 2021. all purchase operations and the redeemed nominal amounts.
Latest observation: January 2021.
5 www.ecb.europa.eu ©TLTRO operations designed to incentivise bank lending to NFCs and households,
supporting the transmission of monetary policy to the real economy
Take-up of ECB liquidity-providing operations Past TLTRO III operations
(€ billion) (left-hand scale – € billion; right-hand scale – %)
TLTRO II TLTRO III Additional LTRO PELTRO Cumulative take-up Unused borrowing allowance Utilization ratio
2,000
3,000 100%
1,800
1,600 2,500 75% 76%
70% 80%
1,400
2,000
1,200 60%
Current take-up:
1,000 €1,792 billion 1,500
800 40%
600 (979 banks, 1,000
19 jurisdictions) 22% 19%
400 20%
500
200 3%
0 - 0%
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 III.1 III.2 III.3 III.4 III.5 III.6
Source: ECB. Source: ECB.
Note: TLTRO III refers to the sum of TLTRO III.1-6. Note: Allotment dates of the respective TLTRO III operations: 9/2019 (III.1), 12/2019 (III.2),
Latest observation: 15 February 2021. 3/2020 (III.3), 6/2020 (III.4), 9/2020 (III.5), 12/2020 (III.6). Future allotment dates: 3/2021 (III.7), 6/2021
(III.8), 9/2021 (III.9), 12/2021 (III.10).
6 www.ecb.europa.eu ©Coordinated central bank measures (Fed, ECB, BoE, BoC, BoJ, SNB)
for providing US dollar liquidity
7
USD funding costs during the COVID-19 crisis (upper Take-up in central banks’ USD operations in major
panel – basis points; lower panel – USD billion) jurisdictions (USD billion)
3-month FX swap 1-week FX swap
ECB-Fed swap line Total alloted volume in operations (RHS) ECB (1w) ECB (84d) BoJ (1w) BoJ (84d) BoE (1w) BoE (84d) SNB (1w) SNB (84d)
500 Coordinated introduction of
100420
weekly USD swap lines with
400 84-day maturity (16-Mar) 80
350
Frequency of 7-day USD
300 operations increased from one
60
per week to daily (23-Mar) 280
200 40
Frequency of 7-day USD
operations lowered from daily
100 to three per week (01-July) 20 210
0 0 140
Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
120
70
60
0 0
Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Source: MMSR, Bloomberg, ECB calculations. Source: Official websites of selected central banks.
Note: Spreads are calculated using transaction data expressed as a spread over the market overnight Latest observation: 11 February 2021.
index swap (OIS) rates. Dates in brackets refer to days from which the measures were in effect.
Latest observation: 15 February 2021.
7 www.ecb.europa.eu ©Eurosystem framework for providing euro liquidity to other central banks
Overview of swap line arrangements Overview of repo line arrangements
Bulgarian
ECB
National Bank
Bank of Swiss National
England Bank
Bank of National Bank
Danish National Albania
Bank of Serbia
Federal
Reserve ECB Hungarian
National Bank National Bank of
People’s Bank Romania
collateral
of China
EUR
Central Bank
Bank of Bank of of the National Bank
Canada Japan Republic of of North
San Marino Macedonia
Croatian
Swap line National Bank
Repo lines
network granted under
EUREP
Source: ECB.
Note: Under the swap line arrangements, the ECB provides euro liquidity against currencies accepted by the ECB for swap line operations. Under the repo line arrangements, the ECB provides euro liquidity against
adequate euro-denominated collateral accepted by the ECB. EUREP is the Eurosystem repo facility for central banks. The countries mentioned in the overview of the Eurosystem’s repo line arrangements are only
examples to illustrate the functioning of these types of agreements. A double line in the swap lines overview indicates that the agreement is reciprocal.
8 www.ecb.europa.eu ©Long-term decline in real equilibrium interest rate in the euro area makes
unconventional monetary policy a suitable instrument
Real interest rate, model-based estimates of the real equilibrium rate and policy rates in the euro area (%)
Estimates of real equilibrium rate
DFR MRO
Real expected short-term rate
6 6 6
5
4 4
4
2 2 3
2
0 0
1
-2 -2
0
-4 -4 -1
1999 2002 2005 2008 2011 2014 2017 1999 2002 2005 2008 2011 2014 2017 2020
Source: “The natural rate of interest: estimates, drivers, and challenges to monetary policy”, ECB Occasional Paper, No 217. Updates: Ajevskis (2018), Brand, Goy, Lemke (2020), Brand, Mazelis (2019), Fiorentini,
Galesi, Pérez-Quirós, Sentana (2018), Holston, Laubach, Williams (2017), Jarocinski (2017).
Notes: The range of estimates includes point estimates from several models and therefore reflects model uncertainty, but no other source of uncertainty. The real expected short-term rate is based on the difference
between EONIA and consensus inflation expectations for the subsequent calendar year.
9 www.ecb.europa.eu ©Further policy rate cuts would have intensified distributional effects
between net borrowers and net savers
Asset purchases vs. interest rate cuts: estimated Estimated change in annual interest receipts/
required interest rate change (basis points) expenditures for net borrowers/savers (€ per household)
Actual change 2014-2019 (no further policy support)
Estimated DFR cut
Additional impact March & June APP/PEPP
0 0
Additional impact w/ additional DFR cuts instead of March & June
APP/PEPP
-50 -50 400
300
200
-100 -100
100
0
-150 -150 -100
-200
-200 -200 -300
Net borrowers (32%) Net savers (68%)
Source: ECB. Source: Dossche, Hartwig and Pierluigi (2020), mimeo.
Note: the chart shows the necessary decrease in overnight interest rates to achieve the Note: “Net borrower” refers to household with negative net financial asset positions. “Net saver” refers to
same effect on inflation as APP/PEPP asset purchases of €1.47 billion (PEPP volume household with positive net financial asset position. Percentages on the horizontal axis indicate share of
increase of December 2020 not included). The blue surface shows the range of estimates the respective households in total households.
across several models. The yellow diamond shows the median.
10 www.ecb.europa.eu ©Monetary policy measures have prevented a severe financial crisis
Indicator of systemic stress in financial markets (CISS) (index)
Euro area US Euro area
US
1.0
PEPP announcement (18 Mar)
0.9 COVID-19 outbreak (19 Feb)
0.8 French-German recovery fund proposal (18 May)
0.8 0.8
0.7 0.7 0.7
0.6 0.6 0.6
0.5 0.5 0.5
0.4 0.4 0.4
0.3 0.3 0.3
0.2 0.2 0.2
0.1 0.1 0.1
0.0 0.0 0.0
1999 2002 2005 2008 2011 2014 2017 2020 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Source: ECB Working Paper No. 1426.
Notes: CISS stands for Composite Indicator of Systemic Stress (0 = no stress,1 = high stress). The indicator aggregates stress signals from money, bond, equity and foreign exchange markets.
Latest observation: 15 February 2021.
11 www.ecb.europa.eu ©Decreasing yields in sovereign debt markets,
reduced risk of fragmentation in the euro area
GDP-weighted yield curve in the euro area 10-year yield spreads of selected government bonds
(%) over German equivalents (basis points)
Pre-COVID-19 outbreak (19 Feb 2020) Italy Greece Portugal Spain
Pre-PEPP announcement (18 Mar 2020) 450
Latest PEPP French- Last Governing
0.8 400 announcement German Council
recovery fund meeting
0.6 350 proposal
0.4 300
0.2 250
0 200
-0.2 150
-0.4 100
-0.6 50
-0.8
0
1 2 3 4 5 6 7 8 9 10
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Year
Source: Bloomberg, ECB. Source: Bloomberg.
Latest observation: 15 February 2021. Latest observation: 15 February 2021.
12 www.ecb.europa.eu ©Easing of financial conditions,
strong loan growth in the euro area
Financial condition index for the euro area Loan growth in the euro area
(index) (year-on-year growth rate, %)
Euro area NFCs households
1.5
10 10
easing
1.0
8 8
tightening Update: DG-M
0.5 6 6
4 4
0.0
2 2
-0.5
0 0
-1.0 -2 -2
-1.5 -4 -4
1998 2001 2004 2007 2010 2013 2016 2019 2009 2011 2013 2015 2017 2019
Source: Refinitiv Datastream, ECB staff calculations. Source: Dealogic.
Notes: Financial condition index is computed as a weighted average of five daily financial indicators Note: Annual growth rates of loans are adjusted for sales, securitization and cash pooling activities.
(spreads, equity prices, short and long rates, exchange rates). Euro area aggregate is the average of Latest observation: December 2020.
Germany, Italy, France and Spain.
Latest observation: 15 February 2021.
13 www.ecb.europa.eu ©Signs of economic recovery with sectoral heterogeneity,
beneficial effects of fiscal measures on the labour market
Confidence indicators in the euro area by sector Unemployment rate and effect of short-time work
(mean-adjusted) schemes (%)
Industrial confidence (excl. construction) Share of workers in job retention schemes
Services confidence Unemployment rate
Construction confidence Unemployment rate in February 2020
Consumer confidence
25 20
15
5 15
-5
-15 10
-25
-35 5
-45
-55 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 DE FR IT ES EA4
Source: DG ECFIN, ECB calculations. Source: Eurostat, Bundesagentur für Arbeit, ifo Institut, Ministère du Travail, de L’Emploi et de L’Insertion,
Latest observation: January 2021. INPS, Ministerio de Inclusión, Seguridad Social y Migraciones, ECB calculations.
Latest observation: January 2021: Kurzarbeit, Cassa Integrazione and ERTE; December 2020: Chômage
Partiel, unemployment rate.
14 www.ecb.europa.eu ©Noticeable impact of monetary policy measures on inflation and economic growth,
higher effectiveness of fiscal policy at effective lower bound
Estimated impact of the monetary policy measures
taken since March 2020 (percentage points) Fiscal multipliers (%)
Estimated impact via a suite of models No Effective Lower Bound
1 year at Effective Lower Bound
2 years at Effective Lower Bound
0.8 0.8
1.2
0.6 0.6 1.0
0.8
0.4 0.4 0.6
0.4
0.2 0.2
0.2
0.0 0.0 0.0
2020 2021 2022 2020 2021 2022 Year 1 Year 2
Inflation Real GDP growth Source: ECB.
Notes: Measured in % deviation from steady state levels. The assumed shock is an increase of the
Source: ECB. government consumption-to-GDP ratio by 1 percentage point. Model simulation based on New Area Wide
Notes: The chart shows the average of estimates from various models. The measures Model with a range of fiscal instruments, see: Coenen et al. (2008), “Tax reform and labour-market
include the PEPP, the TLTRO III and the increase in the APP of €120 billion. The analysis performance in the euro area: A simulation-based analysis using the New Area-Wide Model”, Journal of
refers to the estimated impact of the APP, PEPP, and TLTRO decisions in March, April and Economic Dynamics and Control, Vol. 32 I. 8, pp. 2543-2583.
June 2020. The chart does not include the impact of the December
2020 monetary policy decision.
15 www.ecb.europa.eu ©EU fiscal measures reducing risk of economic divergence,
broadly stable bond free float in the euro area
Real GDP growth and change in public debt ratio in
2020 (%, percentage points) Evolution of bond free float (%)
Change in public debt ratio (2020) Real GDP growth (2020) euro
Euroarea
area US
United States
100
Spain
90
Italy Start of
tapering
in the Start of
France 80 US APP in
the euro
area
Euro Area
70
Germany
60
-20 -10 0 10 20 30 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: SHS, ECB, ECB calculations.
Source:
. European Commission. Notes: The free float measure is defined as the ten-year equivalent holdings of general government
Notes: Real GDP growth rates are based on the European Commission’s Winter 2021 bonds by all investors other than the domestic central bank as a share of the total supply. The bond free
Economic Forecast (released on 11 February 2021). Changes in public debt ratios are float for the euro area refers to the big-4 (Germany, France, Italy and Spain).
based on the European Commission’s Autumn 2020 Economic Forecast. Latest observation: Q4 2020.
16 www.ecb.europa.eu ©Fewer signs of overvaluation in euro area equity markets than in US
Accounting-based equity valuation metrics, US and EA Cyclically Adjusted Price-to-Earnings (CAPE)
total market (distributions since 1985, ratio) (ratio)
Min-max range 25th-50th percentile Euro
EuroArea
area United
UnitedStates
States
50th-75th percentile Latest valuation (15 Feb 21) 50
Median Pre-pandemic valuation (19 Feb 20)
Euro area United States 40
60 Euro area United States 60
60 60
50 50
50 40 50 30
40
40 30 30
40
20
20 20
30 30
10 10
20 0 20 10
0
P/E
P/E
Fwd. P/E
P/E Fwd. P/E
CAPE
CAPE
P/B
P/S
P/B
P/S
10 10
0
0 0 2000 2004 2008 2012 2016 2020
P/E
P/E
Fwd.
CAPE
Fwd.
CAPE
P/E
P/B
P/S
P/B
P/S
Sources: Thomson Reuters, ECB calculations. Sources: Refinitiv and ECB calculations.
Notes: Valuation metrics are recorded at monthly intervals since 1985, except for the forward looking Notes: The Cyclically Adjusted Price-to-Earnings (CAPE) ratio is the inflation-adjusted value of an equity
price-to-earnings (P/E) ratio for the euro area, which is available since 1989. The price-to-book ratio (P/B) index divided by the real earnings of the constituent companies averaged over the last 10 years.
and the price-to-sales ratio (P/S) has been multiplied by a factor of 10. Blue and red bars denote the Latest observation: January 2021 (monthly data).
25th – 50th and 50th – 75th percentiles, respectively. .
Latest observation: 15 February 2021.
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