Christine Lagarde: IMFC Statement
Statement by Ms Christine Lagarde, President of the European Central Bank, at the forty-second
meeting of the International Monetary and Financial Committee, Virtual IMF Annual Meetings,
Washington DC, 15 October 2020.
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The coronavirus (COVID-19) pandemic continues to be a truly global challenge. Countries all
around the world are facing severe human and economic consequences. In the euro area, we
have taken decisive action to mitigate the impact of the crisis, both at the national and European
levels. However, a global challenge of this nature also requires global solutions and strong
international cooperation.
At the global level, it will be crucial not to withdraw the policy support prematurely, including on
both the monetary and fiscal sides, as reducing support too soon would risk delaying the
economic rebound. At the same time, well-tailored structural measures facilitating the
reallocation of resources over time to more viable sectors will be instrumental in minimising
permanent damage to our economies and thus key for medium-term growth and the inflation
outlook.
Euro area developments and outlook
Following the unprecedented fall in output in the first half of the year, economic indicators are
pointing to a strong rebound in activity in the third quarter. This rebound is nevertheless uneven
across sectors and regions, and a further sustained recovery remains highly dependent on how
the pandemic will affect consumption, savings and investment decisions. While uncertainty
about the path the pandemic will take is likely to dampen the strength of the recovery and affect
the resilience of the labour market, the euro area economy will continue to be supported by very
accommodative monetary and fiscal policies along with an expected gradual resumption in global
activity. Inflation has been in negative territory since August, largely reflecting the sharp decline in
energy prices earlier this year and the mid-year temporary cut in German VAT rates. These
factors, combined with the impact of weak demand, downward pressure on wages and the
euro's appreciation weighted on inflation although there was also some upward pressure related
to supply constraints. On the basis of current and futures prices for oil and taking into account
the temporary reduction in the German VAT rate, headline inflation is likely to remain negative
over the coming months before turning positive again in early 2021. Over the medium term, a
recovery in demand, supported by accommodative monetary and fiscal policies, will put upward
pressure on inflation.
Monetary policy
Since our last IMFC meeting in April, the ECB's Governing Council has taken further decisive
monetary policy measures to support the economy during its gradual reopening and to safeguard
medium-term price stability.
We recalibrated the pandemic emergency purchase programme (PEPP), increasing its size by
€600 billion in June to a total of €1.35 trillion, and extending its duration until at least the end of
June 2021 and, in any case, until the Governing Council judges that the coronavirus crisis phase
is over. Moreover, we decided to reinvest the principal payments from maturing securities
purchased under the PEPP until at least the end of 2022. The PEPP purchases aim to ensure
the smooth transmission of our monetary policy across all sectors and euro area jurisdictions
and to ease the overall monetary policy stance, helping to offset the downward impact of the
pandemic on the projected path of inflation.
In addition, we further eased the terms and conditions for accessing central bank liquidity under
our third targeted longer-term refinancing operations programme (TLTRO III) to strengthen the
incentives for banks to continue lending to the real economy. This was accompanied by an
easing of collateral requirements to ensure that banks can make full use of these operations. For
a year, banks will be able to borrow at negative rates, which can be as low as -1%, on the
condition that they lend to the economy. Largely in response to this recalibration, we have seen a
very high take-up in our operations by banks, which has translated to a continued flow of credit to
households and firms and kept lending rates at historic low levels. Moreover, we decided to
conduct a new series of seven pandemic emergency longer-term refinancing operations
(PELTROs) to provide liquidity support to the euro area financial system and help to preserve the
smooth functioning of money markets by providing an effective backstop following the expiry of
the bridge longer-term refinancing operations (LTROs) conducted since March 2020.
Overall, the monetary policy measures we have taken since early March are providing crucial
support to the economy, supporting access to financing, including for those most affected by the
spread of the pandemic, and contributing to maintaining favourable financing conditions for all
sectors and jurisdictions.
In the current environment of elevated uncertainty, the Governing Council will carefully assess all
incoming information, including developments in the exchange rate, with regard to its implications
for the medium-term inflation outlook. We continue to stand ready to adjust all of our instruments,
as appropriate, to ensure that inflation moves towards our inflation aim in a sustained manner, in
line with our commitment to symmetry.
Moreover, the ECB's strategy review, which was delayed because of the pandemic, has
resumed recently and will be an important focus for our work over the next year.
Euro area banking sector developments and financial stability issues
The euro area financial sector has shown resilience so far, due to the measures taken following
the financial crisis and the fiscal, prudential and monetary policy response that played a key role
in maintaining credit supply and preventing a large increase in corporate and household defaults.
However, financial stability risks in the euro area remain elevated, as vulnerabilities in the
nonfinancial sector have increased owing to weak earnings and rising indebtedness. Euro area bank
profitability has continued to decline, and is expected to remain very weak, with credit losses set
to increase. This is reflected in the low market valuations of euro area banks and has added to
structural challenges, such as overcapacity and limited revenue diversification. Nevertheless,
euro area banks currently have sufficiently robust capital and liquidity buffers to absorb losses
and support lending to the real economy. The ECB and the national micro- and macroprudential
authorities deployed extraordinary measures to limit the consequences of the pandemic, acting
in a countercyclical manner. The ECB encouraged banks to use their capital and liquidity buffers
for lending purposes and loss absorption.
We also continue to closely monitor risks in the non-bank financial sector. During the market
turmoil in March, some investment funds and money market funds experienced significant
liquidity stress, which exposed pre-existing vulnerabilities. Liquidity strains in the non-bank
financial sector amplified the market sell-off and threatened to spill over to the broader financial
system and, potentially, to the real economy. Monetary policy actions taken by the ECB and other
central banks around the world in the pursuit of their respective mandates helped improve market
conditions during this period. But this episode highlighted that the resilience of the non-bank
financial sector needs to be strengthened through regulatory reforms, which should also reflect
macroprudential perspectives. This is especially important given the growing role of non-bank
financial institutions in financing the real economy and their interlinkages with the rest of the
financial system.
Europe's response to the coronavirus shock
Europe's fiscal policy response to the coronavirus shock has been crucial in cushioning the
immediate impact of the crisis on Member States' economies. National fiscal policy measures
continue to be the first line of defence to secure employment and safeguard the survival of
productive firms. These emergency measures should be as targeted and temporary as possible.
The three safety nets agreed at the European level complement national efforts, with up to €540
billion of additional funding support being made available for workers, companies and sovereigns.
An ambitious and coordinated euro area fiscal stance remains critical to support the recovery.
The recovery fund (under the "Next Generation EU" umbrella) agreed by the European Council in
July will provide much-needed further macroeconomic support and build a ramp towards a
modern, green and digital European economy. It will be important to ensure that the European
funding for the recovery is used in a timely manner and in a way that enhances long-term growth
and resilience and supports common EU objectives.
International crisis response
As national authorities have been taking the necessary steps to fight the pandemic, global
cooperation and resource-sharing across nations continue to be vital. Addressing international
trade disruptions, preserving trade openness and ensuring universal access to vaccines and
treatments will be of paramount importance for a durable global economic recovery.
Further international efforts will be needed to counter the consequences of the pandemic and
maintain a well-functioning international monetary system. The ECB supports the crisis
response measures taken by the IMF. We continue to be open to exploring a possible new
special drawing rights (SDR) allocation for all IMF members. We welcome progress on
implementing the agreed reforms to double the New Arrangements to Borrow and the new round
of Bilateral Borrowing Agreements on 1 January 2021. Still, the IMF resources need to be kept
under close review. Given high debt levels worldwide, we are also broadly supportive of the IMF's
comprehensive work agenda on debt issues.
During the first phase of the pandemic shock, major central banks, including the ECB, took
coordinated action to enhance the provision of US dollar liquidity. In addition, the ECB agreed to
bilateral euro swap and repo line arrangements with some EU and EU neighbouring countries'
central banks. It also established a new precautionary backstop facility (EUREP) under which
euro liquidity can be provided against high quality euro-denominated collateral to a broader set of
central banks. By ensuring that euro liquidity is available to counterparties outside the euro area,
the Eurosystem's swap and repo agreements help prevent euro liquidity shortages from
becoming financial stability risks, and support the use of the euro in global financial and
commercial transactions. Taken together, these measures contribute to the smooth
transmission of monetary policy in the euro area and thereby help the ECB to fulfil its price
stability objective.
The international community will have to cooperate more closely, and learn from each other with
respect to the effectiveness of the various policy measures introduced. The current pandemic
also provides a crucial opportunity to build a more resilient future, with greater focus on mitigating
climate change and fostering digitalisation and inclusion. We welcome the plans to further
integrate climate change-related issues into IMF surveillance. At the ECB, as part of our strategy
review, we will examine the risks posed by climate change and how these risks feed into the
monetary policy framework. Likewise, the international community has to work together to
enhance cross-border payment systems to make them faster, cheaper and more inclusive, and
to address the opportunities and challenges of the digitalisation of finance. At the ECB,
discussions have started on whether to issue a digital euro to make our currency fit for the digital
age. A digital euro would be a complement to, not a substitute for, cash.