Not yet at a point where we can reach a conclusion on negative rates
There is a risk that negative rates end up being counterproductive
Outlook for monetary policy is skewed towards adding further stimulus
QE is probably less potent now than in March
Risks are skewed towards even larger job losses
Difficult to see a scenario where all furlough workers are reintegrated seamlessly
The speed of the recovery is likely to be slower while the virus remains a concern
UK recovery in Q3 is a little bit ahead of expectations
The economy can be viewed as glass half-full or half-empty
Labour demand is weak, unemployment is higher than reported number
Investment is also very weak, but housing market is strong
We will do everything we can to support the UK economy
We have looked very hard at scope to cut rates further
That includes negative interest rates
Concluded that negative rates should be in the toolbox
We do not intend to take any action to tighten policy until there is very clear evidence of significant progress to achieve 2% inflation target sustainably
Like the Fed, BOE is flexible in returning inflation back to its target
The economy’s faster-than-expected rebound in the last few months has reflected a benign window in which large fiscal support has coincided with the relaxation of lockdown measures and low infection rates. This window may now be closing.
Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers.
The strength in money growth is an indication of the exceptional level of fiscal and monetary policy support in recent months. It is unlikely to translate into excess spending given the economic impact from Covid-19.
Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two and a longer period of excess supply than the forecast in the August MPR.
If these risks develop, then some further monetary loosening may be needed in order to support the economy and prevent a persistent undershoot of the 2% inflation target.
Yields in the gilt market are extraordinarily low
Trends over many years have pushed down rates
We are not actively planning for negative rates
We are using tried and test policies such as QE
Important to stress that negative rates are now in the toolbox
Financial structure is a key conditionality for negative rates
BOE can support the transition by keeping rates low
Reuters reports that the size of the European Central Bank’s bond purchases will depend on the inflation outlook, the ECB’s chief economist Philip Lane said on Tuesday, warning once again about “highly uncertain” economic prospects for the euro zone.
“The overall envelope of PEPP (Pandemic Emergency Purchase Programme) purchases is a core determinant of the ECB’s overall monetary stance,” Lane said in a blog post.
“In line with the ECB’s price stability mandate, the inflation outlook plays the central role in determining the appropriate monetary stance.”
We should envisage support continuing beyond 2020
We really have to maintain attractive conditions until the middle of next year at least
Economic recovery will be sequential
The recovery will be a complicated matter, there is a lot of uncertainty
Savings grew substantially over the past two months
It will take a while before that translates back into investments, spending
Central banks have responded to the crisis in a 'massive' way
This crisis is worse than the 2008-09 financial crisis
The ECB mandate is the same i.e. focus on price stability
We have to use instruments that provide the most proportionate response
Needed to ensure that there was sufficient liquidity
Also needed to make sure that banks could continue lending to the economy
For once, monetary policy and fiscal policy worked hand in hand
Massive programme of asset purchases has been the right thing to do.
Central bank independence should not be called into question by COVID-19.
Financial system mustn’t become reliant on these extraordinary levels of central bank reserves.
Current scale of central bank reserves mustn’t become a permanent feature.
Elevated balance sheets could limit the room for manoeuvre in future emergencies.
As economies recover, it’s likely that some of the exceptional monetary stimulus will need to be withdrawn, including by reducing reserves.
Reuters reports that the European Central Bank's top supervisor urged banks on Friday to eat into their capital buffers and continue lending during the coronavirus crisis, insisting the ECB would be slow in raising requirements again.
"I hear sometimes that banks might not be willing to use the buffers because of concerns that the ECB would... ask for a fast replenishment of the buffers," Andrea Enria told a virtual meeting of bankers.
"I want to reassure all parties that we will strive to put in place a well-designed and credible path to normality," he added.
Reuters reports that European Central Bank Governing Council member Ignazio Visco said on Friday policy makers had to act to head off deflationary risks brought about by the sudden halt to economic activity during the coronavirus crisis.
Visco, who is also governor of the Bank of Italy, said disinflationary pressures could be strong and persistent, threatening economies where already high levels of public debt are growing massively during the crisis.
Presenting the Bank of Italy's annual report, he said the ECB was ready to use all the instruments available to ensure that all sectors of the economy could benefit from accommodative financing conditions.
"Steps must be taken to counter the significant risk of low inflation and the marked fall in economic activity from translating into a permanent reduction in expected inflation or into the possible resurfacing of the threat of deflation," he said.
"Also as a result of the high levels of public and private debt in the euro area as a whole, this could trigger a dangerous spiral between the fall in prices and that in aggregate demand."
CNBC reports that the vice president of the European Central Bank (ECB) has backed the unprecedented stimulus packages launched in the region, saying there were no alternatives for lawmakers.
Governments from euro area countries have passed major stimulus efforts in a bid to soften the impact of the coronavirus crisis and keep people in work. Fiscal deficits are expected to widen, debt piles will climb and the financial repercussions could be felt for generations.
However, Luis de Guindos, the vice president of the euro zone’s central bank, said the issue of lofty debt levels needs to be put into perceptive.
“At the end of the pandemic for sure that we will have higher public debt ratio. But the alternative of doing nothing is much worse,” he told CNBC’s Annette Weisbach when asked specifically about Italy.
“It would be much worse in terms of the crisis. And it would be much worse in terms of the recovery phase,” he added.
The ECB vice chief said that concerns over public finances in the medium term will have to be addressed. But for now, he called for “powerful and strong” fiscal responses at both the national and pan-European level.
It is very hard to forecast how badly the economy has been affected
Economic contraction now seen somewhere between 'medium' and 'severe' scenario
ECB had to resort to exceptional measures to make sure there is plenty of liquidity
ECB primary objective is to ensure price stability
Reuters reports that the coronavirus-hit euro zone economy probably will not return to its pre-pandemic levels until next year at the earliest, the European Central Bank's chief economist told El Pais newspaper, adding that the ECB was prepared to tweak its tools if needed.
"From today's perspective, it looks in any case unlikely that economic activity will return to its pre-crisis level before 2021, if not later," Philip Lane said in the interview published on the ECB's website.
Lane said the ECB was constantly monitoring the situation and was ready to adjust all of its instruments if that proved necessary. He added that the ECB's Pandemic Emergency Purchase Programme, also known as PEPP, could be adjusted.
He said the ECB was analysing the situation ahead of the upcoming June meeting, adding: "If we see that financial conditions are too tight, or the pressure on individual bond markets is not reflecting economic fundamentals, we can adjust the size or duration of our purchases, which we can anyway allocate flexibly over time and market segments."
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