Meeting of 10-11 March 2021

• Ms Schnabel reviewed the financial market developments since the Governing Councils previous monetary policy meeting on 20-21 January 2021.
• The measurable rise in commodity prices had added to upward pressure on long-term nominal bond yields.
• The increase in long-term bond yields had been more muted in the euro area than in other advanced economies.
• A decomposition of the ten-year overnight index swap rate indicated that investors had hardly changed their views on the expected future path of short-term rates.
• Real ten-year risk-free interest rates had fluctuated over time but had fallen back close to the levels prevailing around the 9-10 December 2020 Governing Council meeting.
• Changes in the corporate default outlook mirrored expectations of a significantly improved growth outlook, contributing to favourable valuations in credit markets.
• In February, portfolio inflows into emerging markets had continued at a robust pace, although they had started to reverse during the week ahead of the current meeting.

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

• Mr Lane reviewed the global environment and the recent economic and monetary developments in the euro area.
• In the March 2021 ECB staff macroeconomic projections for the euro area, global activity and trade had been revised up over the projection horizon after the global economy bounced back during the second half of 2020 at a faster pace than envisaged.
• Since the Governing Councils January monetary policy meeting, oil prices had risen by 23% and had climbed to USD 67.8 per barrel, close to pre-pandemic levels.
• In terms of the exchange rate, the euro had depreciated against the US dollar (-2.0%) but remained broadly stable in nominal effective terms (-0.3%).
• However, the recovery was expected to vary across the different GDP components and to rely quite heavily on fiscal support over the next two years.
• Zooming in on the latest economic developments, containment measures had had to remain stricter in the first quarter of 2021 than previously expected, holding back the near-term recovery but not really changing the overall path.
• Based on the latest PMIs for February, the divergence in manufacturing and services growth dynamics was expected to continue.
• Trade had weakened at the turn of the year, driven mainly by weak intra-euro area exports, notwithstanding continued growth in extra-euro area exports.
• The sell-off in bond markets had been synchronised and broad-based across major advanced economies, pointing to an important global factor.
• Indices of financial conditions assign different weights to developments in financial markets and their respective signals could therefore differ somewhat.
• Bank lending rates to firms remained close to historical lows, reflecting the continued pass-through of recent monetary policy accommodation.
• However, the decline in nominal rates in the euro area throughout 2020 had been counterbalanced by lower inflation expectations for much of this period, keeping real rates above pre-pandemic levels.
• As partly anticipated, a sizeable additional stimulus was foreseen for 2021 in response to new lockdown measures.

Monetary policy considerations and policy options

• Looking beyond the short-term weakness, euro area economic activity was expected to gain momentum in the course of the year.
• Accordingly, the March 2021 staff projections foresaw growth rebounding to 4.0% in 2021 and to 4.1% in 2022, before stabilising at 2.1% in 2023.
• The risks surrounding the euro area growth outlook over the medium term had become more balanced, although downside risks remained in the near term.
• In the overall context of a holistic and multifaceted approach to evaluating financing conditions (spanning the entire transmission chain of monetary policy), developments in risk-free interest rates and sovereign yields were particularly relevant.
• First, these market interest rates could be more directly influenced by the Governing Councils monetary policy measures, notably its asset purchases.
• The Governing Council should review the purchase pace on a quarterly basis at its monetary policy meetings, based on joint assessments of financing conditions and the inflation outlook.
• Furthermore, the flexibility of purchases over time, across asset classes and among jurisdictions would continue to support the smooth transmission of monetary policy.
• Flexibly implemented asset purchases were a suitable monetary policy instrument that remained more efficient than alternative tools for preserving favourable financing conditions in the current pandemic environment characterised by high uncertainty.
• Their benefits for achieving the ECBs price stability mandate also clearly outweighed any potential negative effects on other economic policy domains.

2. Governing Council’s discussion and monetary policy decisions

Economic and monetary analyses

• With regard to the economic analysis, members generally agreed with the assessment of the current economic situation in the euro area and the risks to economic activity provided by Mr Lane in his introduction.
• While the overall economic situation was seen to improve during 2021, uncertainty surrounding the near-term economic outlook remained, relating in particular to the dynamics of the pandemic and the speed of vaccination campaigns.
• Looking ahead, the ongoing vaccination campaigns, together with the envisaged gradual relaxation of containment measures, underpinned the expectation of a firm rebound in economic activity in the course of 2021.
• This was seen to constitute an upside risk to the global and, consequently, euro area economic outlook as embedded in the staff projections.
• Incoming economic data, surveys and high-frequency indicators pointed to continued economic weakness in the first quarter of 2021 driven by the persistence of the pandemic and the associated containment measures.
• Overall, members generally agreed with the baseline view for economic growth in the March 2021 staff projections and noted that it was broadly unchanged from the December 2020 Eurosystem staff projections.
• The potential emergence of financial amplification loops would then also affect the medium-term economic outlook.
• It was also recalled that economic developments continued to be uneven across economic sectors, as the containment measures affected the services sector more adversely than the manufacturing sector.
• On the other hand, the ongoing pandemic including the spread of virus mutations and its implications for economic and financial conditions continued to be sources of downside risk.
• This would allow the Next Generation EU programme to contribute to a faster, stronger and more uniform recovery and would increase economic resilience and the growth potential of Member States economies, thereby supporting the effectiveness of monetary policy in the euro area.
• On the other hand, it was pointed out that economic agents would likely look through the temporary rise in inflation.
• Turning to the monetary analysis, members concurred with the assessment provided by Mr Lane in his introduction.
• The prospect of increasing non-performing loans in the banking sector bore a risk of creating financial amplification loops, which ultimately could also cloud the medium-term economic outlook and give rise to financial stability risks.

Monetary policy stance and policy considerations

• With regard to the assessment of financial and financing conditions, there was broad agreement among members that financing conditions were to be assessed on the basis of a holistic and multifaceted set of indicators covering the entire chain of monetary policy transmission.
• Longer-term risk-free interest rates and sovereign bond yields in the euro area had increased since the Governing Councils early December meeting.
• Moreover, financing conditions for the non-financial private sector had remained very favourable overall, also on account of ample monetary policy support.
• The role of the targeted longer-term refinancing operations, which could shield banks somewhat from possible increases in market-based funding costs, was also underlined.
• Members concurred with Mr Lane that ample monetary stimulus remained necessary to preserve favourable financing conditions over the pandemic period in order to ensure a sustained convergence of inflation towards the Governing Councils aim.
• The focus of the Governing Councils December decisions had been on countering an unwarranted and premature tightening of financing conditions, rather than preserving any particular level.
• A possible misperception that the Governing Council was engaging in a form of implicit yield curve control had to be avoided.
• This would send a strong signal that the Governing Council wanted to lean against the tightening of financing conditions.
• Moreover, the view was put forward that the tightening might not be sizeable and persistent enough to affect broader financing conditions materially.
• It was important to provide reassurance that the Governing Council would maintain an accommodative monetary policy for as long as necessary and saw no risk of overheating in the euro area in the present environment.

Monetary policy decisions and communication