The ECB’s policy response to the COVID-19 pandemic

www.ecb.europa.eu ©

The ECB’s policy

response to the

COVID-19 pandemic

Isabel Schnabel

Member of the ECB Executive Board

University of Cyprus, School of

Economics and Management

24 June 2021

www.ecb.europa.eu © 2

Severe economic slump with long-lasting effects

Source: ECB.

Notes: The area shaded in grey indicates the range of Eurosystem staff projections covering a

milder and a more severe impact of the crisis.

Latest observations: Q1 2021 for realised GDP data and for ECB staff projections published in June

2021.

Current Eurosystem staff projections

Source: ECB.

Notes: The area shaded in grey indicates the range of staff projections covering a milder and a

more severe impact of the crisis.

Latest observation: Q1 2021 for quarterly data, May 2021 for monthly data (diamond).

Real GDP

(index: Q4 2019 = 100)

HICP inflation

(year-on-year change, %)

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2019 2020 2021 2022

June 2021 Eurosystem staff projections - range

June 2021 Eurosystem staff projections

Realised HICP

Realised HICP (Apr-21 and May-21 average)

March 2020 ECB staff projections

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

2019 2020 2021 2022 2023

June 2021 Eurosystem staff projections - range

June 2021 Eurosystem staff projections

Realised GDP

March 2020 ECB staff projections

80

85

90

95

100

105

110

2019 2020 2021 2022 2023


Long-term decline in real equilibrium interest rate in the euro area makes

unconventional monetary policy a suitable instrument

Sources: Brand, C., Bielecki, M. and Penalver, A. (eds.) (2018), “The natural rate of interest: estimates, drivers, and challenges to monetary policy”, Occasional Paper Series, No 217, ECB, December. Updates:

Ajevskis (2018), Brand, Goy, Lemke (2020), Brand, Mazelis (2019), Fiorentini, Galesi, Pérez-Quirós, Sentana (2018), Holston, Laubach, Williams (2017), Jarocinski (2017).

Notes: The range of estimates includes point estimates from several models and therefore reflects model uncertainty, but no other source of uncertainty. The real expected short-term rate is based on the

difference between EONIA and consensus inflation expectations for the subsequent calendar year.

-4

-2

0

2

4

6

1999 2002 2005 2008 2011 2014 2017

Estimates of real equilibrium rate

Real expected short-term rate

Real interest rate, model-based estimates of the real equilibrium rate and policy rates in the euro area (%)

-1

0

1

2

3

4

5

6

1999 2002 2005 2008 2011 2014 2017 2020

DFR MRO

3

https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op217.en.pdf


Evolution of ECB balance sheet (€ billions)

Source: ECB, ECB calculations.

Latest observation: 22 June 2021.

Sharp expansion of ECB balance sheet due to pandemic crisis measures

0

1000

2000

3000

4000

5000

6000

7000

0

1000

2000

3000

4000

5000

6000

7000

2007 2009 2011 2013 2015 2017 2019 2021

MRO LTRO TLTRO Public APP (PSPP, SMP) Private APP (CSPP, CBPP3, ABSPP) PEPP

Corona

outbreak

4


0

200

400

600

800

1,000

1,200

Mar-20May-20

Jun-20Jul-20

Aug-20Sep-20

Oct-20Nov-20

Dec-20Jan-21

Feb-21Mar-21

Apr-21May-21

DE FR IT ES Other

March 2020

Envelope set

at €750bn

June 2020

Envelope

increased to

€1,350bn

December 2020

Envelope

increased to

€1,850bn

Flexibility of asset purchases under PEPP

over time, across asset classes and among jurisdictions

PEPP monthly net purchases and bimonthly net

purchases by asset class (€ billions)

Source: ECB.

Note: Cumulative monthly net purchase figures represent the difference between the acquisition

cost of all purchase operations and the redeemed nominal amounts. DE – Germany, FR – France,

IT – Italy, ES – Spain. Cumulative net purchase figures exclude private sector purchases.

Latest observation: May 2021.

PEPP cumulative net purchases

(€ billions)

Source: ECB.


DG-M

0

20

40

60

80

100

120

140

Mar-20 Jul-20 Nov-20Mar-21-10

80

170

260

Mar-20May-20

Aug-20Sep-20

Dec-20Jan-21

Apr-21May-21

Commercial paperCorporate bondsCovered bondsPublic sector securities

5


TLTRO operations designed to incentivise bank lending,

supporting the transmission of monetary policy to the real economy

Source: ECB.

Note: TLTRO III refers to the sum of TLTRO III.1-8.


Take-up of ECB liquidity-providing operations

(€ billions)

Source: ECB.

Note: Allotment dates of the respective TLTRO III operations: 9/2019 (III.1), 12/2019 (III.2),

3/2020 (III.3), 6/2020 (III.4), 9/2020 (III.5), 12/2020 (III.6), 3/2021 (III.7), 6/2021 (III.8). Future

allotment dates: 9/2021 (III.9), 12/2021 (III.10).

Past TLTRO III operations

(left-hand scale – € billions; right-hand scale – %)

3%

22% 19%

70% 72% 74%

79% 82%

0%

20%

40%

60%

80%

100%

0

500

1,000

1,500

2,000

2,500

3,000

III.1 III.2 III.3 III.4 III.5 III.6 III.7 III.8

Cumulative take-up Residual Borrowing Allowance Utilization ratio

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Jan-20 May-20 Sep-20 Jan-21 May-21

TLTRO II TLTRO III Additional LTRO PELTRO

Current take-up:

€2,217 billion

Residual borrowing allowance Utilisation ratio

6


0

50

100

Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21

0

100

200

300

400

500

Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21

7

Source: Official websites of selected central banks.


Source: MMSR, Bloomberg, ECB calculations.

Note: Spreads are calculated using transaction data expressed as a spread over the market

overnight index swap (OIS) rates. Dates in brackets refer to days from which the measures were in

effect.


USD funding costs during the COVID-19 crisis (upper

panel – basis points; lower panel – USD billions)

DG-M

Total allotted volume in operations

ECB-Fed Swap Line 3-month FX Swap 1-week FX Swap

Coordinated introduction of weekly USD swap

lines with 84-day maturity (16-Mar)

Frequency of 7-day USD operations increased

from one per week to daily (23-Mar)

Frequency of 7-day USD operations

lowered from daily

to three per week (01-July)

0

50

100

150

200

250

300

350

400

450

Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

ECB (1 W) ECB (84 D) BoJ (1 W) BoJ (84 D)

BoE (1 W) BoE (84 D) SNB (1 W) SNB (84 D)

7

Take-up in central banks’ USD operations in major

jurisdictions (USD billions)

Coordinated central bank measures (Fed, ECB, BoE, BoC, BoJ, SNB)

for providing US dollar liquidity


Eurosystem framework for providing euro liquidity to other central banks

Source: ECB.

Note: Under the swap line arrangements, the ECB provides euro liquidity against currencies accepted by the ECB for swap line operations. Under the repo line arrangements, the ECB provides euro liquidity

against adequate euro-denominated collateral accepted by the ECB. EUREP is the Eurosystem repo facility for central banks. The countries mentioned in the overview of the Eurosystem’s repo line

arrangements are only examples to illustrate the functioning of these types of agreements. A double line in the swap lines overview indicates that the agreement is reciprocal.

ECB

National Bank of

Romania

Hungarian

National Bank

Bank of

Albania

colla

tera

l National Bank

of Serbia Danish National

Bank

People’s Bank

of China

Swap line

network

Federal

Reserve

Bank of

Japan

Bank of

England

Swiss National

Bank

Bank of

Canada

ECB

Bulgarian

National Bank

Croatian

National Bank Repo lines

granted under

EUREP

EU

R

National Bank

of North

Macedonia

Central Bank

of the

Republic of

San Marino

Overview of swap line arrangements

Overview of repo line arrangements

8


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


PEPP announcement (18 Mar)

Covid-19 outbreak (19 Feb)

French-German recovery fund proposal (18 May)

Source: Holló, D., Kremer, M. and Lo Duca, M. (2012), “CISS – A composite indicator of systemic stress in the financial system”, Working Paper Series, No 1426, ECB, March.

Notes: CISS stands for Composite Indicator of Systemic Stress (0 = no stress,1 = high stress). The indicator aggregates stress signals from money, bond, equity and foreign exchange markets.


0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1999 2002 2005 2008 2011 2014 2017 2020

EA USA

Indicator of systemic stress in financial markets (CISS) (index)

Monetary policy measures prevented a severe financial crisis

United States COVID-19 outbreak (19 Feb) Euro area

9

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1426.pdf
























-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1 2 3 4 5 6 7 8 9 10

Year

Pre-COVID-19 outbreak (19 Feb 2020)

Pre-PEPP announcement (18 Mar 2020)

Latest

Asset purchases offsetting upward pressure on sovereign bond yields

and reducing risks of fragmentation in the euro area

Source: Bloomberg, ECB.


10-year yield spreads of selected government bonds

over German equivalents (basis points)

Source: Bloomberg.


0

50

100

150

200

250

300

350

400

450

Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

Portugal Spain Italy Greece Cyprus

PEPP announcement

French-German recovery fund proposal

GDP-weighted sovereign bond yield curve in the euro

area (%)

10


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1998 2001 2004 2007 2010 2013 2016 2019

Euro Area

Easing of financial conditions in the euro area,

sharp jump in bank lending to corporates in spring 2020

Source: Refinitiv Datastream, ECB staff calculations.

Notes: Financial condition index is computed as a weighted average of five daily financial indicators

(spreads, equity prices, short and long rates, exchange rates). Euro area aggregate is the average

of Germany, Italy, France and Spain.


Financial condition index for the euro area

(index)

Loan growth in the euro area

(year-on-year growth rate, %)

Source: Dealogic.

Note: Annual growth rates of loans are adjusted for sales, securitization and cash pooling activities.

Latest observation: April 2021.

Update: DG-M tightening

easing

-4

-2

0

2

4

6

8

10

2009 2011 2013 2015 2017 2019 2021

NFCs householdsEuro area Households

11


Noticeable impact of monetary policy on inflation and economic growth,

strong economic recovery with sectoral heterogeneity

Source: ECB.

Notes: The chart shows the average of estimates from various models. The measures include the

PEPP, the TLTRO III and the increase in the APP of €120 billion. The analysis refers to the

estimated impact of the APP, PEPP, and TLTRO decisions in March, April and June 2020. The

chart does not include the impact of the December

2020 monetary policy decision.

Estimated impact of the monetary policy measures

taken since March 2020 (percentage points)

Source: European Commission (DG ECFIN), ECB calculations.


0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

2020 2021 2022 2023 2020 2021 2022 2023

Estimated impact via a suite of models

-55

-45

-35

-25

-15

-5

5

15

25

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Industrial confidence (excl. construction)

Services confidence

Construction confidence

Consumer confidence

Inflation Real GDP growth

12

Confidence indicators in the euro area by sector

(mean-adjusted)


Fiscal policy cushioning the impact of the pandemic on the labour market,

rising public debt ratios with cross-country heterogeneity

Source: Eurostat, Bundesagentur für Arbeit, ifo Institut, Ministère du Travail, de L’Emploi et de

L’Insertion, INPS, Ministerio de Inclusión, Seguridad Social y Migraciones, ECB calculations.

Note: DE – Germany, FR – France, IT – Italy, ES – Spain, EA4 – Germany, France, Italy and Spain.

Latest observation: April 2021: Kurzarbeit, Chômage Partiel and ERTE; March 2021: Cassa

Integrazione; April 2021: unemployment rate.

Unemployment rate and effect of short-time work

schemes (%)

Source: European Commission.

Note: DE – Germany, ES – Spain, FR – France, IT – Italy, CY – Cyprus, EA – euro area.

Latest observation: 2020.

0

5

10

15

20

DE FR IT ES EA4

Share of workers in job retention schemes

Unemployment rate in April 2021

Unemployment rate in February 2020

25

50

75

100

125

150

175

2007 2009 2011 2013 2015 2017 2019

DE ES FR IT EA CY

13

Public debt ratios

(% of GDP)


0

10

20

30

40

50

0

10

20

30

40

50

2000 2003 2006 2009 2012 2015 2018 2021

Euro area United States

Rising equity prices driven by longer-term earnings expectations,

fewer signs of overvaluation in euro area equity markets than in US

Sources: Refinitiv, IBES, Consensus Economics, Bloomberg and ECB calculations.

Notes: The decomposition is based on a dividend discount model. The model includes share-

buybacks, discounts future cash-flows with interest rates of appropriate maturity, and includes five

expected dividend growth horizons. See ECB (2018), Economic Bulletin, Issue 4 for more details.

Latest observation: 18 June 2021 (weekly data).

Sources: Refinitiv and ECB calculations.

Notes: The Cyclically Adjusted Price-to-Earnings (CAPE) ratio is the inflation-adjusted value of an

equity index divided by the real earnings of the constituent companies averaged over the last ten years.

Latest observation: May 2021 (monthly data).

.

US and EA Cyclically Adjusted Price-to-Earnings

(CAPE) (ratio)

-80

-40

0

40

80

-80

-40

0

40

80

Jan-20 Jul-20 Jan-21

Equity risk premiumRisk-free discount ratesLonger term earnings growth expectationsShort term earnings growth expectationsDividends and share buybacksEA Total Economy Index

Drivers of equity prices in the euro area (cumulative

change measured in %, re-based to zero in Jan-2020)

Longer-term earnings growth expectations Short-term earnings growth expectations

14


Global recovery accompanied by sharply rising commodity and producer prices,

uncertainty about pass-through to consumer prices

Sources: OECD, Haver Analytics and ECB staff calculations.

Note: The global CPI refers to OECD area. The global PPI is based on a GDP-PPP weights

aggregation of 20 systemically important advanced and emerging market economies.

Latest observation: April 2021.

.

DG-MP -4

-2

0

2

4

6

8

10

12

2015 2017 2019 2021

Headline CPIHeadline PPI

-4

-2

0

2

4

6

8

10

12

2015 2017 2019 2021

CPI excl. food and energyPPI excl. energy

Global inflation measures

(annual percentage changes)

Source: Bloomberg.

Note: Copper price is LME Copper 3-month rolling forward. The CRB Industrial Metals Equity Index

is issued by Commodity Research Bureau (Barchart) and is based on the unweighted geometric

mean of copper scrap, lead scrap, steel scrap, tin and zinc spot prices.


50

100

150

200

250

300

350

400

450

0

20

40

60

80

100

120

140

160

180


Brent Crude (lhs) Copper (lhs)

CRB Spot Metals Index (lhs) Lumber (rhs)

Commodity prices

(index: 1 January 2020 = 100)

15


Gradual recovery of inflation expectations,

uncertainty about spending of accumulated excess savings

Sources: Bloomberg, Refinitiv, ECB calculations.

Notes: Probabilities implied by five-year zero-coupon inflation options, smoothed over five business

days. Risk-neutral probabilities may differ significantly from physical, or true, probabilities.


.

Probability of average inflation over the next five

years (%)

Sources: Eurostat, national sources and ECB internal estimates.

Note: Chart shows the stock of excess savings accumulated since Q4 2019. Accumulated savings

is defined as the cumulated difference between realised and estimated savings based on a pre-

pandemic counterfactual path.

Excess accumulated savings in the euro area

(€ billions)

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

2014 2015 2016 2017 2018 2019 2020 2021

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

0

100

200

300

400

500

DE FR IT ES NL Others Euro area

Q1 2020 Q2 2020 Q3 2020 Q4 2020

16


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The ECB’s policy response to the COVID-19 pandemic