12.04.2021
The ECB monetary policy response to the pandemic crisis*
1st Ibero-American Central Bank Conference/Banco de España and
IberoAmerican General Secretariat
Pablo Hernández de Cos
Governor of the Banco de España
*English translation of the original speech in Spanish
Good afternoon, ladies and gentlemen (or good morning to those joining us from the other
side of the Atlantic).
It is a source of great personal satisfaction to welcome you to this 1st Ibero-American Central
Bank Conference. For the Banco de España it is an honour to have jointly organised it with
the Ibero-American General Secretariat, and I would first like to thank their
SecretaryGeneral, Rebeca Grynspan, for her resolve in bringing this initiative to fruition.
On 21 April the stage is set for the 27th Ibero-American Summit of Heads of State and
Government, an established forum for dialogue, coordination and cooperation at the highest
level between the 22 countries making up the Ibero-American community. Within the
framework of the Summit, this meeting today seeks to contribute to the debate relating to
the functions proper to central banks. In this connection we will not be starting from scratch,
as there is a long-standing tradition of dialogue and cooperation between the Latin
American and Caribbean monetary authorities (a somewhat more extensive geographical
area than the strictly Ibero-American space), pursued mainly under the auspices of CEMLA
(the Center for Latin American Monetary Studies), which will be celebrating 70 years of
existence in 2022.
This meeting is taking place a little over one year after the start of the COVID-19 crisis, which
has been characterised by its global scale, unprecedented intensity, high persistence and a
very marked differential impact across sectors, countries and population groups.
Currently, there are hopeful signs alongside causes for concern.
On the positive side, the roll-out of the vaccination process, and the gradual approval of
new vaccines and a brisker pace of manufacture and distribution, allow us to discern a
scenario entailing the resolution of the health crisis and, consequently, the prolongation of
the incipient economic recovery. Indeed, the latest IMF forecasts published last week
envisage an upward revision of the forecast for global growth, compared with its projections
in January. The latest figures highlight the buoyancy of the world's two biggest economies,
the United States and China, which will be among the few to have attained their
prepandemic level of GDP before the end of this year.
However, this favourable outlook runs in parallel with high uncertainty on several fronts.
First, epidemiologically speaking, the emergence of new strains of the virus and doubts over
the effectiveness of vaccines against them, coupled with the uneven pace of progress in the
different countries' vaccination calendars, raise questions about when we will manage to
fully resolve the health crisis. And this unevenness, accompanied by other country-based
idiosyncratic factors, is giving rise to appreciable and growing divergences in the pace of
economic recovery globally. There are also many doubts about the structural damage
wreaked by the crisis on the productive system, particularly in those sectors and countries
most affected and where it is proving most persistent.
In these circumstances, international cooperation is, in my view, all the more important.
Healthwise, the crisis will clearly not be resolved until immunity against the virus has been
achieved in all countries. On the economic front, divergences in the rate of recovery may be
particularly harmful for economies that are in a more vulnerable situation. A premature
tightening of international financial conditions could pose a serious obstacle to the efforts
of recovery of those economies with limited space for their national policies. And that could
delay their recovery and, ultimately, also adversely affect the global economy.
Thus, in accordance with the communication approved by the International Monetary and
Financial Committee last week, international cooperation is crucial both for accelerating
vaccine production and for making distribution affordable and fair for everybody. In the
economic arena we must also maintain the stimulus measures for as long as necessary,
adapting them to countries' changing circumstances, until the recovery has taken root. Only
then may these stimuli be cautiously withdrawn.
The current juncture is, in fact, a particularly timely one to give fresh impetus to
multilateralism, where the multilateral institutions have a crucial role to play. The aim is not
only to cement global economic recovery, but also to counter the backtracking seen in
inequality and poverty as a result of this pandemic and to jointly tackle the common
structural challenges derived from digitalisation and the fight against climate change. And
this without forgetting the need to strengthen pre-emptive and common response
mechanisms to systemic crises like the present one.
In this respect, the G20 resolutions reached to respond to the impact of the crisis on
lowincome economies via debt-relief measures are praiseworthy; but consensus must now be
forged to address the situation which middle-income countries are also facing (a category
in which a good number of the Ibero-American community countries fit), with limited room
for manoeuvre in their national policies.
With these same objectives, international institutions must complement and improve
coordination with regional institutions and mechanisms, which may be more effective in
providing solutions for countries that share a common institutional framework or similar
economic structures.
Following this introduction, allow me to move on to the first panel of the Conference, which
will focus on analysing the role of monetary policy in the context of the pandemic. We will
be joined by Agustín Carstens, the General Manager of the Bank for International
Settlements, Alejandro Díaz de León, Governor of the Central Bank of Mexico (Banco de
México), Liliana Rojas-Suárez, Chair of the Latin-American Committee for Financial Affairs
and Director of the Initiative for Latin America of the Centre for Global Development, and
Leonardo Villar, Governor of the Central Bank of Colombia (Banco de la República).
Clearly, monetary policy has played - and continues to play - a crucial role in this crisis. And
this has been so not only in the advanced economies, but also in the emerging ones, and
specifically in Latin America. There, the region's central banks cut their policy interest rates
to record lows, and some even set in place asset purchase programmes for the first time in
their history. This session of the conference will largely address the experience of the Latin
American central banks in monetary policy management during the pandemic.
But let me take this opportunity to share with you some brief thoughts on the European
Central Bank's (ECB) monetary policy and its conduct during the pandemic. In many cases,
they may also be applied to other countries.1
Firstly, allow me to highlight the importance of the ECB's swift and forceful monetary
policy response.
As I said, the outbreak of COVID-19 in Europe in late February and early March 2020
prompted a health crisis that resulted in an economic shock on an unprecedented scale.
This shock was accompanied by a strong tightening in the euro area's financial conditions.
Financial markets began to discount significant declines in economic activity and an
escalation in public and private debt as various governments announced lockdown plans to
counter the virus. That pushed interest rates on sovereign and corporate debt markets
upwards, a movement which, had it not been curtailed in time, ran the risk of amplifying the
fall in aggregate demand and, by extension, in inflation.
Faced with these circumstances, on the ECB Governing Council we acted rapidly and
forcefully. In particular, we announced on 18 March the launch of the pandemic emergency
purchase programme (PEPP), which allows the ECB to purchase public and private sector
bonds and other debt instruments. The PEPP had an initial envelope of €750 billion (6.6%
of euro area GDP in 2020) and was scheduled to last until end-2020. It paved the way for a
gradual easing of financing conditions which has continued to date. The targeted
longerterm refinancing operations (TLTROs) for the banking sector were also very successful. For
example, in the June 2020 operation, participating banks received a total of €1.31 trillion, a
record for Eurosystem refinancing operations.
Estimates by Banco de España researchers suggest that the PEPP will have had a
firstorder positive impact on inflation and on the GDP growth rate in the 2020-2022 period.2 The
evidence available also suggests that the TLTROs have fulfilled the function for which they
were designed, as banks have used the financing received to grant loans to the real
economy.3
Admittedly, it is difficult to accurately quantify the economic and financial deterioration that
would have ensued had the PEPP and the rest of the measures not been launched, and
therefore to estimate the resulting overall effect on euro area macroeconomic
developments. But one of the main effects of the monetary policy measures, in a setting as
adverse as that in place at the onset of the pandemic crisis, has been to avoid disruption
on financial markets that would have ultimately given rise to a much deeper and persistent
crisis.
Secondly, the comprehensive nature of the monetary policy response has also been
very important.
It should be borne in mind that the COVID-19 outbreak in the euro area came about against
a background of: low inflation and extensive monetary stimulus, with benchmark interest
rates at a record low of -0.5%; net asset purchases under the asset purchase programme
(APP); and a set timetable for the TLTROs.
In this setting, the ECB measures have run along two main axes: the purchase of financial
assets and the provision of liquidity to commercial banks, covering the euro area economy's
main financing channels.
As regards asset purchases, I have already referred to the approval of the PEPP. The main
aim of this programme is to ease financing conditions and ensure the smooth transmission
of the common monetary policy to all euro area countries.
As to liquidity provision, we should recall that, in the euro area, banks are the main source
of financing for households, the self-employed and firms. It was therefore vital to head off a
severe contraction in the flow of credit to the real economy. The risks of a contraction
stemmed chiefly from two factors: first, the possibility that money markets would deteriorate
to the point of compromising banks' access to them; and second, banks' possible
reluctance to assume fresh risks in the form of loans against a backdrop of enormous
economic uncertainty.
To tackle the first of these risks, the ECB launched a line of longer-term refinancing
operations (LTROs). These provided banks with "bridge financing" under advantageous
terms until end-June 2020, at which point there would be a major liquidity auction. This
measure contributed to stabilising the banking sector's financing costs in the initial phase
of the pandemic. As to the second risk, the ECB already had an instrument to encourage
banks to extend credit: the aforementioned TLTROs. This programme grants banks
financing under particularly favourable conditions, provided they meet targets for granting
credit to households and firms. With the onset of the pandemic, this programme was
recalibrated to make it more attractive to banks, allowing them temporarily to obtain
financing at an interest rate as low as -1%, on condition they did not reduce their volume of
eligible lending.
Also, given that banks participating in Eurosystem refinancing operations must offer
collateral to obtain liquidity, we decided to ease the collateral framework conditions so that
they could obtain a greater amount of financing in these operations. The measures adopted
included most notably reducing the average haircut applied to the value of the collateral and
accepting higher-risk assets as eligible, including loans backed by the national authorities'
various programmes.
Thirdly, the importance of the ECB's flexibility as regards the recalibration and use of
instruments should be highlighted.
By way of illustration, the evolution of the economic crisis caused by the pandemic required
an increase in the PEPP in June of €600 billion, and of €500 billion in December, up to a
total of €1.85 trillion. The net purchase horizon was also extended until at least end-March
2022 and the maturing securities reinvestment horizon until at least end-2023.
In December we also decided to recalibrate the conditions of the TLTROs. We extended by
12 months, until June 2022, the period during which the reduced interest rate for banks
meeting the lending target will be applicable, scheduling three additional quarterly
operations between June and December 2021, and increasing the borrowing allowance of
TLTRO funds each bank can obtain from 50% to 55% of its eligible loans. Another of our
decisions was to extend until June 2022 the aforementioned collateral framework flexibility
measures.
But apart from this flexibility in the response over time, there is a key difference in the PEPP
compared with the previous asset purchase programme (APP). Whereas the APP retains a
relatively rigid structure regarding the distribution of asset purchases both over time and
across jurisdictions, the PEPP afforded itself from the outset the possibility of concentrating
these purchases in the most critical months of the crisis and in the countries which, at each
point in time, have been subject to tighter financing conditions. Perfectly illustrating this
flexibility in the distribution of purchases over time is the fact that the average monthly pace
of purchases in the April-June period was €113 billion, whereas from October to December,
against a backdrop of greater easing in sovereign debt markets, average monthly purchases
barely exceeded €60 billion.
Thanks to this flexibility, along with the large volume of asset purchases initially envisaged,
the announcement of the creation of the PEPP on 18 March helped substantially reduce
sovereign yields in the euro area, particularly in countries such as Italy and Spain. These
countries had relatively high levels of public debt and were also more affected by the first
wave of the virus, both in epidemiological terms and given their dependence on more
vulnerable sectors such as tourism and hospitality. The outcome was a much more
pronounced increase in financing costs in these countries, that the PEPP's flexibility has
enabled us to counter by ensuring a smooth transmission of our monetary policy to all euro
area countries.
This flexibility is again proving particularly useful in the current situation. Indeed, after
extending our programme last December, there was a rise in long-term interest rates in a
setting in which our inflation forecast was some distance off target and below that expected
before the crisis. Against this background, we stressed last March that we would use the
flexibility of our PEPP to increase purchases in the following months, with the aim of
preserving favourable financing conditions and thus preventing a tightening of these
conditions that is inconsistent with countering the downward impact of the crisis on the
inflation path.
A fourth aspect worth highlighting is that of the complementarity of the ECB's action
to that taken by the fiscal and prudential authorities.
We all concur that fiscal policy should be the first line of defence against this crisis. It has
the most suitable instruments for mitigating the effects of the crisis on households and firms,
in particular in a setting in which these effects are proving uneven and of uncertain duration.
That said, the monetary policy decisions adopted by the ECB, and especially those relating
to the PEPP, are particularly significant from this perspective. Indeed, they have provided
the fiscal authorities with space to extend and maintain their support measures for the
economy. Hence, net asset purchases under the PEPP in 2020 have risen to an amount
equivalent to over 90% of the euro area countries' net public financing needs that same
year (and almost 30% of gross needs), according to preliminary estimates. This is
particularly important in countries such as Spain which, as I mentioned, has been
particularly affected by the COVID-19 crisis and whose initial deficit and public debt levels
were high. The ECB's actions are heading off an increase in financing costs which,
potentially, would have significantly curbed the national fiscal authorities' capacity to
support the economy.
The ECB's measures have complemented those adopted both by national governments (in
particular the public guarantee programmes backing loans) and by the prudential authorities
(aimed at allowing financial institutions to use some of the capital buffers built up in recent
years). This has proved key to smoothing the flow of financing to the economy during the
crisis.4
Let us not forget that, in addition to the response of national fiscal policies, on this occasion
there has also been a genuinely pan-European response to the crisis, in which the creation
of the Next Generation EU (NGEU) recovery fund has been to the fore.5 This fund adds
significant elements for sharing the economic recovery effort, some of which
unprecedented, such as the large-scale issuance of supranational European public debt to
finance reforms and investments in the Member States most affected by the pandemic.
In conclusion, let me simply reiterate the major role we central banks have played and must
continue to play in overcoming this crisis. Set against high uncertainty and a still-fragile
economic situation, monetary policies need to continue contributing to maintaining
favourable financing conditions that allow the recovery to take firm root. The road ahead will
not be free from setbacks and difficulties. Some will be directly related to the pandemic and
its legacy in terms of the solvency of households and firms, with others stemming from
potentially adverse developments on financial markets. Attesting to the latter, for example,
has been the increase in recent months in long-term interest rates in different parts of the
world. The possibility of tensions on financial markets and a tightening of financing
conditions, in a setting in which public and private debt has increased notably, is one of the
main risks central banks must tackle, in advanced and emerging economies alike.
Thank you.