10 Dec 2020

Jan Krahnen: "The ECB takes precautions and retains full flexibility"

SAFE Director sees the European Central Bank's current monetary policy decision primarily as a cautionary strengthening of its future ability to act

With its recent monetary policy decision, the ECB’s council has left the key interest rate level unchanged, but at the same time increased the volume of the pandemic emergency purchase programme (PEPP) by 500 billion euro to a total of 1.8 trillion euro, as expected. In addition, to deal with the effects of the Corona crisis the programme will be extended at least until March 2022 and the reinvestment of principal payments from maturing securities purchased under the PEPP will last until at least the end of 2023. Jan Krahnen, Director of the Leibniz Institute for Financial Research SAFE, explains:

“The ECB's decision not only to increase the PEPP, but to extend its duration, is initially a clear signal to banks, markets and thus also to companies affected by the Corona crisis throughout Europe. The financial and time extension of the programme improves the ECB's legroom. In this way, the central bank is taking precautions and retaining full flexibility.

It is noteworthy that the ECB has not taken further measures, such as lowering refinancing rates or increasing the exemption limits for bank deposits, which would have directly addressed not only liquid reserves but also the profitability of banks. The ECB obviously wants to wait until the Corona-related uncertainty about the economic consequences for companies and banks dissipates in one direction or the other.”