Banco de España : Reseña de la reunión de política monetaria del Consejo de Gobierno del BCE (9-10 de diciembre de 2020) (320 KB)

01/14/2021 | 08:18am

14 January 2021

Account of the monetary policy meeting of the Governing Council

of the European Central Bank

held in Frankfurt am Main

on Wednesday and Thursday, 9-10 December 2020

………………………………………..…….

Christine Lagarde

President of the European Central Bank

1. Review of financial, economic and monetary developments and policy options

Financial market developments

Ms Schnabel reviewed the financial market developments since the Governing Council's previous monetary policy meeting on 28-29 October 2020.

Developments in global financial markets had been driven by a strong improvement in risk sentiment. The main catalyst had been the news on the effectiveness and imminent roll-out of multiple coronavirus (COVID-

  1. vaccines. Two additional factors had reinforced and amplified the improvement in risk sentiment. First, there were growing signs of a forthcoming bipartisan fiscal stimulus programme in the United States in the wake of the formal commencement of the presidential transition process. Second, the communication by the ECB's Governing Council that it would recalibrate its instruments at its December meeting had strengthened confidence in the ECB's commitment to monetary policy remaining a reliable source of support. This commitment had supported a broad-based easing of financial conditions.

In stock markets, those sectors and countries that had been hit hardest by the pandemic had benefited the most from hopes that a vaccine would restore economic and social activity more rapidly. This group included many large euro area countries. However, despite the recent strong rally, stock valuations of firms in many crisis-hit sectors in the euro area remained well below their pre-pandemic levels.

In euro area government bond markets, improving risk sentiment had supported a further decline in spreads of lower-rated sovereigns in recent weeks. All euro area countries could now fund long-term borrowing at, or below, rates equivalent to the GDP-weighted average of the rates on bonds of non-euro area advanced economies. This highlighted the extent of the monetary stimulus that the ECB was currently providing, and was expected to provide in the future, to mitigate the social and economic costs of the pandemic.

Monetary policy had likely also been a key factor mitigating the increase in euro area risk-free yields in response to positive macroeconomic shocks. Real long-term rates and inflation expectations had moved in opposite directions in recent weeks. Ten-year inflation swaps had increased by more than 25 basis points since the Governing Council's meeting on hopes of a faster recovery than previously expected, while real rates had steadily moved lower. In addition, the spread of the ten-year German Bund over the corresponding overnight index swap (OIS) rate had started trending lower from mid-September 2020 as German Bund yields had fallen more sharply than the equivalent OIS rates. Such developments typically reflected expectations of a change in the net supply of bonds, which was consistent with investors anticipating a recalibration of the pandemic emergency purchase programme (PEPP).

As a result, the degree of monetary policy accommodation currently embedded in euro area sovereign bond markets was practically unprecedented in the period since the global financial crisis, both in its scale and in its breadth across countries. The entire euro area GDP-weighted sovereign yield curve was significantly below its

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pre-pandemic level and firmly in negative territory. The dispersion across euro area ten-year sovereign yields had reached a new post-2008 low.

Benign conditions in sovereign bond markets and increased risk appetite had also left their mark on euro credit markets. Spreads of financial and non-financial issuers had fallen further and were now approaching their pre- COVID-19-crisis levels.

As regards exchange rate developments, with the year-end approaching, risks of a no-deal Brexit had increased considerably over the past few days. While market participants both in the United Kingdom and in the euro area seemed to be prepared for a no-deal Brexit scenario, the implied volatility of the GBP/EUR exchange rate had increased sharply in recent days, especially for short-term maturities.

In addition, optimism about medical breakthroughs and a faster global recovery had fuelled further US dollar weakness. The nominal effective US dollar exchange rate had depreciated by more than 3.5% over the course of November 2020. There was model-based evidence that the improvement in risk sentiment, reflecting prospects of a faster global recovery, had been the major factor driving the recent appreciation of the euro. A comparison of the stock market performance of export-oriented euro area firms with the performance of firms whose business models depended more on domestic demand suggested that there was no clear evidence, so far at least, that negative competitiveness effects were perceived by investors to significantly counteract the positive global demand effects implied by a weaker US dollar.

Overall, financial conditions at the global level and in the euro area were highly accommodative. ECB staff analysis suggested that monetary policy had played an important part in restoring and easing financial conditions at the global level. It had added substantially to the positive effects stemming from receding risk aversion among market participants.

The global environment and economic and monetary developments in the euro area

Mr Lane reviewed the global environment and recent economic and monetary developments in the euro area.

As regards the global economy, growth momentum had weakened amid rising cases of infection and stricter containment policies, while the vaccine news had lifted prospects for the future. Global GDP and global trade had suffered a massive blow in 2020 and the deep contraction in world demand had had major effects on exports of euro area firms. Large fiscal support packages had preserved jobs and boosted disposable incomes, especially in advanced economies, and private consumption had recovered robustly in the third quarter. However, the outlook for the fourth quarter had weakened substantially owing to the resurgence of COVID-19 infections, coupled with the assumption of a no-deal Brexit and a faltering fiscal stimulus in many countries. The Purchasing Managers' Index (PMI) had deteriorated markedly in November across major advanced economies with the exception of the United States. There had been a significant recovery in world trade in the third quarter. Based on forward-looking PMI data on new export orders, world trade was expected to continue to grow in the fourth quarter.

Global financial conditions had loosened further, driven by higher equity prices and declining spreads.

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Brent crude oil prices had climbed above USD 48 per barrel on the back of the improving global risk sentiment, implying an increase of 20% since the October monetary policy meeting of the Governing Council. The euro had appreciated markedly against the US dollar (3.2%) but had remained broadly stable in nominal effective terms (0.3%).

Turning to the euro area, the December 2020 Eurosystem staff macroeconomic projections entailed a deterioration in the short-term outlook, followed by a robust rebound with real GDP expected to return to its pre-crisis level by mid-2022 in the baseline scenario, which was broadly within the range of forecasts by other institutions and the private sector. Regarding the latest developments, real GDP had expanded by 12.5%, quarter on quarter, in the third quarter of 2020, according to Eurostat. Manufacturing production had been broadly unchanged between July and September. Meanwhile, the recovery in services was lagging that in manufacturing, but was also slowing, and there was considerable divergence in activity levels across the services sector. The short-term outlook was dominated by the effect of the new containment measures introduced to stem the resurgence of coronavirus infections.

Focusing on demand components, private consumption had rebounded strongly in the third quarter but remained well below its pre-pandemic level. A contributing factor to the rebound had been strong demand for durable goods, including some consumption that had been postponed from the second quarter, although it remained uncertain to what extent "lockdown-inducedpent-up demand" had been satisfied. Regarding the fourth quarter, retail sales had been resilient in October, while data on credit card payments, by contrast, pointed to a notable drop in spending in the last week of October and during November, although this was much smaller than the reduction in footfall in retail outlets and recreational establishments. With spending in decline and incomes still supported by government short-term work schemes, the saving ratio was expected to rise again in the fourth quarter.

Business investment, which was closely related to developments in output, had also rebounded in the third quarter. But the outlook for business investment remained subdued in the light of reduced revenues, low rates of capacity utilisation and fragile corporate balance sheets. Euro area trade had rebounded strongly in the third quarter of 2020 (driven by trade in goods) and had provided a positive contribution to GDP growth. However, renewed lockdown restrictions were likely to interrupt the pattern of the recovery in trade.

Looking at the euro area labour market, the unemployment rate had increased by only around 1.2 percentage points since February 2020 and stood at 8.4% in October 2020, as a result of special government support measures, especially in the form of job retention schemes including short-time work schemes. In the third quarter labour force growth had been recovering after the sharp declines recorded during the first few months of the pandemic. At the same time, high-frequency indicators suggested that job creation was being particularly hard hit during the pandemic.

Turning to nominal developments, the December 2020 Eurosystem staff projections included downward revisions to HICP inflation and HICP inflation excluding energy and food (HICPX). These projections, which foresaw HICP inflation rebounding from 0.2% in 2020 to 1.0% in 2021 and gradually increasing further, to stand at 1.4% in 2023, were at broadly similar levels to forecasts by other international institutions and the private sector over the medium-term horizon.

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Banco de España published this content on 14 January 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 January 2021 13:17:07 UTC

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