European Central Bank policymakers were concerned that the resurgence in the coronavirus pandemic that has led to restoration of lockdown in several countries could prolong the economic crisis, minutes of the latest policy session showed on Thursday.
“Members considered that the impact of positive news regarding the availability of vaccines on the medium-term outlook needed to be weighed against the impact of the more negative latest news on infection rates and containment measures in the short term,” the minutes, which the ECB calls ‘account’, of the December 9-10 Governing Council meeting showed.
Policymakers pointed out that the expected shape of the recovery now looked very different from the V- and U-shapes expected earlier in the year.
“It was possible that given the more positive starting point, the second wave of the pandemic would not make the crisis deeper as a whole, but would make it more drawn out than previously anticipated,” the minutes said.
Rate-setters assessed that a protracted curtailment of activity might inflict more lasting damage on a number of sectors, with heightened risks of rising insolvencies and unemployment. This could in turn affect the medium-term outlook for the euro area economy and more protracted scarring effects owing to the delay in the recovery.
Countries such as Germany and France had imposed partial lockdowns in December as the coronavirus, or Covid-19, cases surged.
Exceptionally high uncertainty persisted surrounding the growth and inflation outlook in Eurozone and that positive sentiment could erode fast in the face of negative news, the minutes said.
Policymakers also drew attention to the exchange rate in relation to the inflation outlook. They pointed out that the nominal effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook.
They raised concerns over risks related to developments in the exchange rate that might have negative consequences for the inflation outlook.
All members agreed on the need for a downward revision in the projected inflation path and additional monetary policy measures, the minutes showed.
In December, the the ECB increased the size of its pandemic emergency purchase programme, or PEPP, by EUR 500 billion to a total of EUR 1,850 billion.
Some policymakers sought a more moderate increase in the PEPP envelope on the argument that significant space for purchases was still available from past decisions.
They also pointed out the need for “keeping some powder dry” by maintaining the option to further adjust the envelope in the future, in an environment of high uncertainty.
Others proposed a larger increase in the PEPP envelope saying the current boost was insufficient to ease financing conditions further and bring inflation closer to the Governing Council’s aim. Further, the additional envelope of EUR 120 billion for the asset purchase program would have been exhausted by the end of 2020.
“By extending and partly increasing the level of monetary policy accommodation until early 2022, there is very little the ECB can and would want to do,” ING economist Carsten Brzeski said.
The economist said only two factors could trigger new ECB action in the coming months: a further rapid strengthening of the euro and an unexpected surge in inflation expectations in financial markets.
The next ECB rate-setting session is scheduled for January 21.
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