Christine Lagarde faced “reservations” from a vocal minority of the European Central Bank’s governing council members over her call as ECB president for a “no limits” policy to shield the eurozone from the coronavirus pandemic at its emergency meeting last month.
These dissenting views were referred to in the latest account of the ECB council’s conference call on March 18, when it decided to buy €750bn more bonds in a significant expansion of its asset-purchase programme to address “severe strains” in financial markets.
According to the official account of the call, which was published on Thursday, council members unanimously agreed on the need to step up their action. But they expressed diverging views on whether the ECB should lift the self-imposed limits on its asset-purchase programme and whether it should rely on existing tools rather than launching a new scheme.
The divisions highlight concern among some council members that by massively scaling up its asset purchases with almost no limits on how to deploy them, the ECB could blur the lines between fiscal and monetary policy and stray into monetary financing of governments, which is against EU law.
“Reservations were expressed by some members about the necessity of launching a new, dedicated asset purchase programme [APP],” it said. “While these members concurred with the clear need for action, they expressed a preference for employing the existing toolkit of the governing council, such as scaling up the current APP or considering Outright Monetary Transactions (OMTs).”
The proposal by some council members to rely on OMT — an untested and controversial measure that allows it to buy an unlimited quantity of a country’s bonds as part of an official EU bailout — underlines the tensions stirred up by Ms Lagarde’s “no limits” approach.
“Regarding the OMTs, the programme had been designed to address a fundamentally different contingency, that of safeguarding the singleness of the ECB’s monetary policy in the event of severe tensions in the government bond markets of one or several euro area countries which originated, in particular, from unfounded fears over the reversibility of the euro,” the account said. “The current situation was generally seen to be rather different.”
There were also “reservations” expressed by some council members on the proposal for the ECB to announce it would consider lifting the limits on its other asset purchase programmes if required — a step it later took.
Some council members argued for doing even more, with one calling for it to cut its deposit rate further into negative territory from its record low of minus 0.5 per cent, “since part of the tightening of financial conditions was due to an upward move in the risk-free curve”.
Another member raised the possibility of buying “additional asset classes” as part of its expanded purchase programme or of lowering the credit rating threshold for private paper purchases to widen the universe of available assets.
In the end, the ECB decided against both ideas and kept its deposit rate unchanged. Instead, it announced plans to buy an extra €750bn of assets this year in a new scheme, dubbed the Pandemic Emergency Purchase Programme, which has very few of the restrictions on its earlier asset purchases and is designed to last until the pandemic is over.
The decision represented a drastic change from its meeting a week earlier, when Ms Lagarde had fuelled tension in eurozone government bond markets by saying it was not the ECB’s role to “close the spread” in sovereign debt markets, referring to the gap between Italian and German bond yields that is a key risk indicator for Italy.
“If anything, additional rate cuts should not be ruled out entirely, as some ECB members still seem to support them,” said Carsten Brzeski, an economist at ING. “More generally, the U-turn by Christine Lagarde to do whatever it takes clearly suggests that the ECB stands ready to do more, if need be.”
When asked whether the ECB had more options available to respond to a worst-case scenario, Ms Lagarde said in an interview with Le Parisien newspaper on Monday: “Yes, but I’m not going to tell you which ones, because the impact will also be linked to the element of surprise.” She added that there was “no limit to our commitment to serving the euro area”.
