Philip R. Lane: Macroeconomic policies in the short term and the
medium term
Panel contribution by Mr. Philip R. Lane, Member of the Executive Board of the ECB, at the
Lámfalussy Lectures E-Conference 2021, organised by the Magyar Nemzeti Bank, 25 January
2021.
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The current configuration of macroeconomic policies around the world is striking. The
largescale-but-temporary nature of a pandemic calls for an outsized fiscal response that takes
account of the shortfall of income for many workers and firms; the asymmetric effects across
industries (depending on their reliance on physical proximity to customers); and the compelling
case for smoothing the financing of the cost of extensive fiscal support over a very extended
period. The optimal contribution of monetary policy in a pandemic is also analytically
straightforward: the ample provision of liquidity to protect credit supply and the stabilisation of
markets, in combination with an accommodative monetary stance to counter the negative
pandemic shock to the projected inflation path which is generated by the large drop in activity
levels compared to the pre-pandemic path of activity.
We consider that the best way for us to achieve our monetary policy aims is to preserve
favourable financing conditions throughout the pandemic period. Our commitment to preserve
favourable financing conditions stabilises markets, supports financial intermediation and
reassures potential borrowers, since the extended presence of the central bank limits the scope
for the type of real-financial doom loop that might otherwise be triggered by an adverse shock in
the current environment. It also anchors the monetary policy stance: the amount of slack in the
economy and the low levels of inflation expected in the latest macroeconomic projections make it
essential to avoid any loss of confidence and crowding-out of economic activity that would be
generated by unfavourable developments in financing conditions.
In overall terms, the ECB supports favourable financing conditions through: (i) the already-low
level of the policy rate (the deposit facility rate); (ii) the forward guidance on the future path of the
policy rate; (iii) our array of liquidity-providing refinancing operations (most prominently, the
targeted longer-term refinancing operations (TLTRO) programme); (iv) asset purchases, with the
steady contribution of our asset purchase programme (APP) (which is buttressed by the forward
guidance that net purchases under the APP will only end shortly before we lift the policy rate);
and (v) our pandemic emergency purchase programme (PEPP).
In terms of policy implementation, the Governing Council of the ECB routinely looks at a wide
range of measures to gauge the state of financing conditions for all sectors of the economy, with
a prominent focus on the conditions facing customers who depend on bank-intermediated credit,
as well as the conditions facing sectors which seek to obtain funding in bond markets. In a
similar vein, a wide array of models and empirical methods is employed to assess the role
played by financing conditions in determining the evolution of the economy and inflation
dynamics.
Naturally, the focus on credit conditions in the banking system on the one side and the bond
markets on the other is consistent with the main methods used by central banks in steering
financing conditions, namely through the various types of operations with banking system
counterparties and through outright securities purchases which primarily focus on bond markets.
Other financial indicators also feed into the staff macroeconomic and inflation projections and are
incorporated into the Governing Council's regular assessments of the appropriate monetary
stance.
The PEPP plays an especially important role, given that it is expressly designed to respond to the
pandemic shock. Thanks to its scale and flexibility, it both underpins the crucial market
stabilisation role of monetary policy (which was urgent in the initial months of the pandemic in the
spring and summer of 2020) and is a substantial contributor to the ample monetary
accommodation required to counter the negative impact of the pandemic on inflation dynamics.
The PEPP is a particularly effective and efficient programme for ensuring that the critical middle
and long-end segments of the yield curve component of overall financing conditions remain
appropriate: the most recent macroeconomic projections suggest that any premature steepening
of the yield curve would not be conducive to countering the negative pandemic shock to the
projected inflation path. More generally, our commitment to employ the PEPP to preserve
favourable financing conditions throughout the pandemic period represents a significant easing of
the monetary policy stance (and thereby boosts inflation expectations) through the forward
guidance it provides. Finally, the revisions to the TLTRO III programme have also played a central
role in easing bank funding conditions in a manner that protects the supply of credit to firms and
households.
There is considerable uncertainty about pandemic dynamics: the recent intensification of the
pandemic in many countries (and the associated containment measures) represents a
significant downside risk and also requires the prolongation of various fiscal support measures.
At the same time, the launch of vaccination campaigns is a milestone in the eventual resolution
of the pandemic health crisis, even if there is only cloudy visibility of the calendar towards
sufficient immunity to enable the restoration of normal economic activity. Under these conditions
of high uncertainty, standard Poole analysis suggests that the preservation of favourable
financing conditions calls for a two-sided and flexible approach to the total scale of asset
purchases under the PEPP: if favourable financing conditions can be maintained with asset
purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the
envelope need not be used in full. Equally, the envelope can be recalibrated if required to
maintain favourable financing conditions to help counter the negative pandemic shock to the path
of inflation.
Looking beyond the pandemic period, the future orientation of macroeconomic policies will need
to meet several challenges. In thinking about the new steady state, the implications of low
equilibrium real interest rates for fiscal policy and monetary policy is a first-order issue. In relation
to fiscal policy, this applies both to reviewing the conditions for fiscal sustainability and the
appropriate role of fiscal policy in macroeconomic stabilisation. In relation to monetary policy, the
decline in the equilibrium real interest rate is a central topic in our ongoing strategy review.