The ECB's policy in the COVID-19 crisis - a medium-term perspective - Isabel Schnabel
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The ECB’s policy in
the COVID-19 crisis
– a medium-term
perspective
10/06/2020 Isabel Schnabel
www.ecb.europa.eu ©Large uncertainty about economic recovery path
Eurosystem staff projections
Real GDP (index: 2019Q4 = 100) HICP inflation (year-on year)
March 2020 MPE June 2020 BMPE March 2020 MPE June 2020 BMPE
%
Mild scenario Severe scenario Mild scenario Severe scenario
110 2.0
105 1.6
100
1.2
95
0.8
90
0.4
85
80 0.0
75 -0.4
2019 2020 2021 2022 2019 2020 2021 2022
Source: ECB.
2 www.ecb.europa.eu ©Furlough schemes preventing stronger rise in unemployment
Unemployment rate, temporary lay-offs and short-term work (% of labour force)
Unemployment rate extended with temporary lay-offs and short-time work
Unemployment rate
60
50
40
30
20
10
0
DE FR IT ES
Sources: Eurostat, ECB staff calculations and country sources. Notes: The unemployment rate refers to April 2020. The extended unemployment rate includes the
number of employees which have been notified under temporary lay-offs and short-time work schemes up to May. This is an upper limit of the number of persons
who will eventually participate in such schemes. The final numbers will be lower. Last observation: May 2020.
3 www.ecb.europa.eu ©Stronger portfolio rebalancing effects unleashed by negative rates
“Footprint” of policy rate cuts across maturity: standard rate cut vs. DFR cut in negative territory
bps bps
0 0
-5 -5
-10 -10
-15 -15
1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y
Standard rate cut DFR cut in negative territory
Source: Rostagno, Altavilla, Carboni, Lemke, Motto, Saint-Guilhem and Yiangou (2019). Notes: Term structure refers to OIS. The changes are normalized to a 10 bps decline of
the OIS rate at the maturity where the measure exerts the maximum impact, namely 1-year for the standard rate cut and 5-years for the DFR cut
4 www.ecb.europa.eu ©Declining systemic stress in financial markets
but still at elevated level
CISS indicator
Euro area US Euro area US
1.0 1.0
FR-DE
0.9 PEPP 0.9
fund
announcement
0.8 proposal 0.8
0.7 0.7
0.6 0.6
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0.0 0.0
1999 2002 2005 2008 2011 2014 2017 2020 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
Source: ECB Working Paper No. 1426. CISS stands for Composite Indicator of Systemic Stress (0=No Stress,1=High Stress). It aggregates stress symptoms across money, bond, equity
and foreign exchange markets and is computed from time-varying correlations among individual asset returns.
Last observation: 08/06/2020
5 www.ecb.europa.eu ©Asset purchases more effective in periods of market stress
Impact of asset purchases during low and high market stress: the US experience
Low stress High stress
5 5
5 25
4 20 4 4
3 15
3 3
2 10
1 5 2 2
0 0 1 1
-1 -5
0 0
-2 -10
-3 -15 -1 -1
Financial Corporate Equity Exchange GDP growth Inflation
Conditions bond prices (rhs) rate (rhs)
Index premium
Source: Motto, Rast and Ristiniemi (2020), mimeo.
Notes: Local projections on monthly sample (2008-2019). Low stress events refer to periods when the VIX is below 25. IRFs scaled to a 50bp decline in 10-year yield on
impact. Markers denote point estimates, error bars 68% significance bands.
6 www.ecb.europa.eu ©PEPP: highly effective and mitigating fragmentation
Estimated impact of PEPP envelope on 10-year
GDP-weighted average sovereign yield elasticities sovereign yields across the four largest EA countries
2-year yield 5-year yield 10-year yield bps Min-max range Median
30 30 30 0 0
bps / €500 bn sov. purchases in EA
-20 -20
20 20 20
-40 -40
-60 -60
10 10 10
-80 -80
0 0 0 -100 -100
PSPP PEPP PSPP PEPP PSPP PEPP
announcement announcement announcement DE FR ES IT
Sources: Refinitiv, ECB calculations. Notes: PEPP estimates derived from an event study Sources: Refinitiv, ECB calculations. Notes: The bigger impact corresponds to the 2-day reaction of
based on a two-day window after 18 March. PSPP estimates based on Eser et al. (2019). yields to the PEPP announcement in March 2020. The smaller impact (upper part of the boxes) is based
Elasticities refer to the change in (GDP-weighted) yields of the Big4 EA countries in on the model by Eser et al. (2019) which uses PEPP-implied projected duration extraction to estimate
the impact on GDP-weighted Big4 sovereign yields. This average yield impact is then distributed to
response to €500bn of sovereign bond purchases in the euro area. No reinvestment 7 country level by assuming the same relative impacts as for the event approach.
www.ecb.europa.eu © 7
assumed.PEPP: absorbing duration risk and easing financial conditions
Impact of asset purchases on free-float ratio of the
four largest EA countries (percentage points) Euro area GDP-weighted yield curve
APP and PEPP (1350bn until June 2021) %
APP and PEPP (750bn until Dec 2020) 0.8 Pre-COVID-19 Pre-PEPP Latest
APP and no PEPP
0 Realised (APP only) 0 0.6
-5 -5 0.4
-10 -10 0.2
-15 -15 0.0
-20 -20 -0.2
-25 -25 -0.4
-30 -30 -0.6
2015 2016 2017 2018 2019 2020 2021 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Sources: ECB calculations. Notes: The figure shows the compression of a free-float Source: ECB. Notes: Pre-COVID-19 refers to 19 February 2020. Pre-PEPP to 18 March
measure (based on the ratio of bond holdings of price-sensitive investors to total bond 2020. Latest refers to 9 June 2020.
supply, both in 10-year equivalents, as in Eser et al. 2019) induced over time by the
successive vintages of the APP and the PEPP. 8 www.ecb.europa.eu ©Dispersion in inflation expectations: financial markets vs. households
Option implied risk-neutral distribution of average Share of euro area households that expect inflation
inflation over the next 5 years (percentages) to increase more rapidly over the next 12 months
Below 0% Between 0% and 1.0%
Between 1.0% and 1.5% Between 1.5% and 2.0% %
Between 2.0% and 2.5% Above 2.5%
100 40
35
80
30
60 25
20
40 15
10
20
5
0 0
2014 2015 2016 2017 2018 2019 2020 Jan-99 May-02 Sep-05 Jan-09 May-12 Sep-15 Jan-19
Sources: Bloomberg, Refinitiv, ECB calculations. Source: European Commission/ Haver Analytics.
Notes: Probabilities implied by five-year zero-coupon inflation options, smoothed over five Notes: Comparison relative to inflation over the past 12 months. Last observation: May
business days. Risk-neutral probabilities may differ significantly from physical, or true, 2020.
probabilities. Latest observation: 8 June 2020 9 www.ecb.europa.eu ©Stabilising rates on non-financial commercial paper,
longer tenors supported by Eurosystem purchases
Commercial paper rates and Euribor Commercial paper: outstanding amounts
3M financial CP issuance rate 0-6 months 6 - 12 months
3M non-financial CP issuance rate 100%
% 3M Euribor
0.0 90%
80%
-0.1 70%
60%
-0.2 50%
40%
-0.3
30%
-0.4 20%
10%
-0.5 0%
Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20
Source: NEU Banque de France Sources: CSDB and ECB calculations. Notes: Non-financial corporate issuers as per CSDB
Note: Issuance of investment grade (short-term rating) CP under French law, weekly data. issuer classification. Non-financial CP segment in the CSDB used as a proxy for the
Last observation: 29 May 2020. Eurosystem eligible CP universe. Outstanding amount breakdown by initial maturity. Last
10 10 observation: 31 May 2020. www.ecb.europa.eu ©Thank you
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