Report of the monetary policy meeting of the Governing Council of the European Central Bank

January 14, 2021

Minutes of the Monetary Policy Meeting of the Governing Council

of the European Central Bank

held in Frankfurt am Main

Wednesday 9 and Thursday 10 December 2020


Christine Lagarde

President of the European Central Bank

Translation: Bank of France

In case of question, the English version prevails.

1. Review of financial, economic and monetary developments and possible monetary policy options

Developments in the financial markets

Ms. Schnabel reviewed developments in financial markets since the previous Governing Council monetary policy meeting on October 28 and 29, 2020.

Developments in international financial markets resulted from a marked improvement in market sentiment towards risk. The main catalyst has been the news of the effectiveness and impending deployment of several vaccines against the coronavirus (COVID-19). Two additional factors reinforced and amplified the improvement in market sentiment. First, signs of an upcoming bipartisan fiscal stimulus package in the United States have multiplied in the wake of the official start of the presidential transition process. Second, the announcement by the ECB’s Governing Council that it would recalibrate its instruments at its December meeting has strengthened confidence in the ECB’s commitment that monetary policy will remain a reliable source of support. This commitment has encouraged a general easing of financial conditions.

In stock markets, the sectors and countries hardest hit by the pandemic have benefited the most from the hope that a vaccine would restore economic and social activity more quickly. This group includes several large countries in the euro area. However, despite the recent strong recovery, stock market valuations of companies in many crisis-hit sectors of the euro area remain well below pre-pandemic levels.

In euro area government bond markets, improving risk sentiment has encouraged lower-rated sovereign bond spreads to fall further in recent weeks. All euro area countries can now obtain long-term debt financing at rates equal to or lower than the GDP-weighted average of bond yields in advanced economies outside the euro area. This situation highlights the magnitude of the monetary stimulus currently provided by the ECB and that it should provide in the future, to alleviate the social and economic cost of the pandemic.

Monetary policy has also probably played a key role in dampening the rise in risk-free returns in the euro area in response to positive macroeconomic shocks. Long-term real interest rates and inflation expectations have moved in opposite directions in recent weeks. Ten-year inflation swaps have risen by more than 25 basis points since the Governing Council meeting, on hopes of a faster-than-expected recovery, while real rates have fallen. registered in regular decline. In addition, the yield spread of the ten-year German Bund against the corresponding overnight swap rate (OIS) declined from mid-September 2020, with Bund yields

Translation: Bank of France

In case of question, the English version prevails.

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German having declined significantly more than the corresponding OIS rates. These developments usually reflect the anticipation of a change in the net supply of bonds, which is consistent with the fact that investors anticipate a recalibration of the emergency purchase program in the face of the pandemic (pandemic emergency purchase program, PEPP).

As a result, the accommodative stance of monetary policy currently embedded in the euro area sovereign bond markets is almost unprecedented since the global financial crisis, both in terms of its magnitude and its generalization to the various countries. The GDP-weighted sovereign yield curve for the euro area as a whole has been significantly lower than its pre-pandemic level and firmly anchored in negative territory. The dispersion of euro area ten-year sovereign yields has reached a new low since 2008.

Favorable conditions in sovereign bond markets and increased risk appetite have also left their mark on euro credit markets. The yield spreads between financial and non-financial issuers have narrowed further and are now approaching their pre-COVID-19 levels.

With regard to exchange rate developments, with the end of the year approaching, the risks of a no-deal Brexit have increased significantly in recent days. While market participants in both the UK and the euro area seem prepared for a no-deal Brexit scenario, the implied volatility of the euro’s exchange rate against the pound sterling has increased sharply. days, especially for short maturities.

In addition, optimism about medical breakthroughs and the accelerating global recovery continued to fuel the weakness of the dollar. The nominal effective exchange rate for the dollar depreciated by more than 3.5% in November 2020. Model data suggests that improving market sentiment, which reflects prospects for a faster global recovery, was the main factor behind the recent appreciation of the euro. A comparison between the stock market performance of euro area exporting firms and that of firms whose business models are more dependent on domestic demand suggests that there is no evidence, at least for now, attesting that the negative competitiveness effects are perceived by investors as clearly offsetting the positive effects on global demand linked to the weakness of the dollar.

Overall, financial conditions both globally and in the euro area are very accommodating. The ECB staff analysis suggests that monetary policy has played an important role in restoring and easing financial conditions globally. This has substantially increased the positive effects linked to the reduction in risk aversion of market participants.

International environment and economic and monetary developments in the euro area

Mr. Lane reviewed the international environment and recent economic and monetary developments in the euro area.

Translation: Bank of France

In case of question, the English version prevails.

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Turning to the global economy, growth momentum has weakened amid increasing cases of infection and tighter containment policies, while vaccine information has improved prospects for the future. . Global GDP and international trade were hit hard in 2020, and the severe contraction in global demand had serious effects on euro area business exports. Major budget support plans have preserved jobs and boosted disposable income, especially in advanced economies, and private consumption rebounded sharply in the third quarter. However, the outlook for the fourth quarter has weakened significantly due to the resurgence of COVID-19 infections, coupled with the assumption of a no-deal Brexit and waning budget support in many countries. The purchasing managers index (PMI) deteriorated sharply in November in the main advanced economies, with the exception of the United States. International trade recovered strongly in the third quarter. Forward-looking data from the Purchasing Managers Index on new export orders suggests that international trade will continue to expand in the fourth quarter.

Global financial conditions eased further, driven by rising stock prices and lower yield spreads.

Brent prices topped $ 48 a barrel amid improving market sentiment towards global risk, a 20% increase since the Governing Council’s monetary policy meeting that took place. is held in October. The euro appreciated significantly against the dollar (3.2%), but remained broadly stable in nominal effective terms (0.3%).

For the euro area, the macroeconomic projections for December 2020 prepared by the Eurosystem staff point to a deterioration in the short-term outlook, followed by a solid rebound, with real GDP returning to its level of ‘before the crisis in mid-2022 in the baseline scenario, which is broadly within the range of projections of other institutions and private sector forecasters. Regarding recent developments, according to Eurostat, real GDP increased by 12.5% ​​quarter on quarter in the third quarter of 2020. Manufacturing production remained broadly unchanged between July and September. At the same time, the recovery in the services sector is lagging behind the manufacturing sector, also slowing down, and a sharp divergence in activity levels has been observed within the service sector. The short-term outlook has been dominated by the effect of new containment measures introduced to curb the resurgence of coronavirus infections.

Regarding the components of demand, private consumption rebounded sharply in the third quarter, but remained well below its pre-pandemic level. Strong demand for durable goods, including the share of consumption postponed from the second quarter, contributed to the rebound, although the extent to which ‘latent containment-induced demand’ was met remains uncertain. Turning to the fourth quarter, retail sales held up well in October, while data on credit card payments showed a noticeable drop in spending during the last week of October and into November. , although much less pronounced than the reduction in the number of customers in retail outlets and places of entertainment. With declining expenses and

Translation: Bank of France

In case of question, the English version prevails.

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To read the rest of this noodl, you can consult the original version here.


Bank of France published this content on 14 January 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 January 2021 15:03:00 UTC

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