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Business & Finance

ECB focuses on bank credit, bonds in gauging financing conditions

  • Naturally, the focus on credit conditions in the banking system on the one side and the bond markets on the other is consistent with the main methods used by central banks in steering financing conditions.
  • If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.
Published January 25, 2021

FRANKFURT: The European Central Bank mainly focuses on bank credit conditions and bond markets when assessing if financing conditions are favourable, ECB chief economist Philip Lane said on Monday, fleshing out key conditions for its stimulus policy.

ECB President Christine Lagarde renewed a commitment to maintaining "favourable" financing conditions last week but did not say what measures were being looked at, and sources close to the discussion said policymakers could not agree on what gauges to focus on.

"Naturally, the focus on credit conditions in the banking system on the one side and the bond markets on the other is consistent with the main methods used by central banks in steering financing conditions," Lane said.

Policymakers agreed to revisit the issue at their March meeting in a potentially critical seminar that could determine how the ECB spends its 1 trillion euros of remaining firepower in its Pandemic Emergency Purchase Scheme (PEPP).

"The ECB routinely looks at a wide range of measures ... with a prominent focus on the conditions facing customers who depend on bank-intermediated credit, as well as the conditions facing sectors which seek to obtain funding in bond markets," he added.

But some policymakers are critical of putting too much emphasis on government bond spreads as that could reduce the incentive for good fiscal policy and may be seen as exceeding the bank's inflation-fighting mandate.

In a speech consistent with Lagarde's policy statement, Lane repeated that the ECB will not necessarily spend all of its remaining bond purchase firepower while reserving the right to increase spending, if market conditions worsen.

"If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full," Lane said.

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