Banco de España : Reseña de la reunión de política monetaria del Consejo de Gobierno del BCE (10-11 de marzo de 2021) (312 KB)

Meeting of 10-11 March 2021

Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 10-11 March 2021

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

Financial market developments

Ms Schnabel reviewed the financial market developments since the Governing Council's previous monetary policy meeting on 20-21 January 2021.

Sovereign yield curves across advanced economies had steepened, while new coronavirus (COVID-19) cases had fallen, the pace of vaccination had accelerated and a large fiscal stimulus programme in the United States was expected to be soon put into law. 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. The euro area GDP-weighted yield curve remained considerably flatter than throughout most of the years preceding the COVID-19 pandemic and it had largely the same shape and location as observed just before the outbreak of the pandemic. Moreover, sovereign spreads had remained resilient, even narrowing in some jurisdictions. Accordingly, the increase in yields reflected primarily a rise in the euro area risk-free rate.

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. Recent yield increases had instead reflected, by and large, rising term premia. As the increase in term premia coincided with a notable rise in inflation swap rates, it was likely that the inflation risk premium had become larger as investors had started reappraising the balance of risk around the inflation outlook. An increase in the inflation risk premium at the current juncture suggested that investors no longer only saw downside risks around the future inflation outlook as they had done for most of 2020.

Real ten-yearrisk-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. They were currently some 120 basis points below their average since 2008. Real short and medium-term rates had been insulated from the recent bond market sell-off and had continued to hit new historical lows in recent weeks.

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Credit markets had remained resilient to the increase in bond market volatility and in risk-free rates, which suggested that investors remained fundamentally positioned for higher growth. Credit spreads across all rating classes, and in particular for high-yield bonds, had continued to narrow over the past few weeks supported by a visible recovery in realised earnings. Changes in the corporate default outlook mirrored expectations of a significantly improved growth outlook, contributing to favourable valuations in credit markets.

In stock markets, the EURO STOXX 50 index had further extended its gains, gradually approaching pre-pandemic levels. ECB staff analysis suggested that the rise in risk-free rates and the deterioration in the short-term earnings outlook due to the prolongation of containment measures had pulled stock prices lower in recent weeks. However, the combination of better long-term earnings expectations on the back of vaccination roll-outs and the associated improvement in risk sentiment had more than offset this drag on stock prices. Yet, in some economies, the rise in risk-free rates had increased risks to asset valuations, which remained predicated on expectations of an extended period of low interest rates.

Developments in emerging markets provided further evidence of investors so far having been able and willing to absorb the rise in risk-free rates. 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.

Finally, in foreign exchange markets, expectations of higher US growth and a less accommodative US monetary policy had put upward pressure on the nominal effective exchange rate of the US dollar and also on the US dollar exchange rate against the euro. At the same time, risk sentiment continued to put some downward pressure on the US dollar on the back of hopes that a resolution of the pandemic and spillover effects from US fiscal policy would kick start and nurture a strong global cyclical upswing.

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.

As regards the external environment, there was an upgrade of the outlook as a result of a combination of ongoing vaccinations, learning effects on how to live with the pandemic and the additional fiscal stimulus in the United States. 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. Based on the latest Purchasing Managers' Index (PMI), output in services had particularly improved of late. Global trade was not yet back to pre-crisis levels and the pace of trade expansion had stalled at the turn of the year, with trade in

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services continuing to be a drag on overall trade owing to limitations on travel and tourism. Since the Governing Council's 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%).

Turning to the euro area economy, growth in the last quarter of 2020 had been stronger than expected, but the ongoing restrictions would have a negative impact on growth in the first quarter - and perhaps also the second quarter - of 2021. Based on the March 2021 staff projections, real GDP would recover to exceed its pre-crisis level (of the fourth quarter of 2019) in the second quarter of 2022 and continue to increase at a robust rate thereafter. 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.

Household savings continued to mirror pandemic-driven consumption dynamics. Savings seemed to have been accumulated mostly by older households, who typically had a lower propensity to consume out of income and wealth. They were therefore less likely to spend their savings as soon as lockdown measures were relaxed. By contrast, the younger population had seen a bigger deterioration in their financial situation, with low-skilled services and jobs particularly hit by the pandemic. Linked to recent delays in vaccination campaigns, households expected normal activities to resume with some delay.

Investment remained quite resilient overall. Data for the production of capital goods gave encouraging signals about ongoing business investment. The resilience in capital goods production was also supported by foreign demand. Housing investment was expected to remain subdued in the near term.

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. Leading indicators for manufacturing exports had continued to rise based on improvements in both shipping and survey indicators available for February.

Labour markets remained resilient on the back of strong fiscal support but some indicators pointed to vulnerabilities further ahead. Overall, survey indicators of employment perceptions had risen somewhat, indicating an expansion for the first time since the onset of the pandemic, but developments remained uneven across countries and sectors. The low-tech services sectors were those most adversely affected

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by the second and third waves of the pandemic. With the tightened restrictions, the importance of job retention schemes had increased again in recent months.

Turning to nominal developments, the short-term inflation outlook for 2021 had been revised up in the March 2021 ECB staff projections, while the inflation path embedded in the December 2020 Eurosystem staff projections was broadly confirmed for the outer years of the projection horizon. The projected profile of inflation in the Harmonised Index of Consumer Prices (HICP) was quite volatile, mainly as a result of energy prices. HICP inflation was expected to jump from 0.3% in 2020 to 1.5% in 2021, before falling back to 1.2% in 2022, and to increase again to 1.4% in 2023. The profile for HICP inflation excluding energy and food (HICPX) had shifted up somewhat, showing a gradual increase from 0.7% in 2020 to 1.3% in 2023.

Zooming in on recent developments, headline inflation had increased sharply to stand at 0.9% in January and February, after four consecutive months at -0.3%. The unchanged rate in February 2021 was the result of less negative energy inflation being offset by a decline in HICPX inflation to 1.1% in February (from 1.4% in January), which was substantially higher than the 0.2% recorded in the last four months of 2020.

The recent upswing in headline inflation reflected a number of factors, including less negative energy inflation, the end of the temporary VAT rate reduction in Germany, changes in sales patterns (timing and volumes) in some countries and the stronger than usual changes in HICP weights for 2021. Linked to the tightening of containment measures, the share of price imputations in the HICP increased further in January. The overall impact of price imputations on the change in HICP inflation remained unclear, adding to the high uncertainty as to whether the recent pick-up in inflation signalled genuinely increasing price pressures.

Key wage measures, based on national accounts data such as compensation per employee or compensation per hour, continued to be strongly affected by the effects of job retention schemes. Relatively strong growth in unit labour costs had continued to contribute positively to developments in the GDP deflator, counterbalancing the effects of lower contributions from profit margins. As a result, the GDP deflator had risen slightly from 1.0% in the third quarter to 1.1% in the fourth quarter of 2020.

As regards inflation expectations, the ECB's Survey of Professional Forecasters (SPF) for the first quarter of 2021 had recorded an upward revision of short and medium-term inflation expectations, while longer-term inflation expectations had increased only very slightly. Market-based measures of inflation expectations stood somewhat above the levels observed around the Governing Council's January monetary policy meeting, with the five-year forward inflation-linked swap rate five years ahead standing at 1.42% on 8 March 2021, compared with 1.32% on 19 January.

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Turning to financial conditions in the euro area, there had been an increase in nominal [government bond] yields at the long end of the curve, an improvement in risk attitude, an increase in inflation-linked swap rates, a decline in sovereign bond risk premia and a slight depreciation of the euro. The sell-off in bond markets had been synchronised and broad-based across major advanced economies, pointing to an important global factor. Looking at corporate bond markets, default rates of high-yield issuers remained much lower than in past crisis episodes. Short-term earnings expectations had deteriorated across almost all sectors since the January monetary policy meeting. Indices of financial conditions assign different weights to developments in financial markets and their respective signals could therefore differ somewhat. While increases in long-term yields signalled some tightening in conditions, the strong stock market and the slight depreciation of the euro pointed to a loosening.

Regarding monetary developments, money growth continued to be strong − with broad money (M3) growing at an annual rate of 12.5% to January 2021 − amid a large footprint of Eurosystem asset purchases, which remained the largest source of money creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth. Short-term monetary dynamics also remained strong. The monthly flow of January was weaker and largely driven by more volatile components. Growth in bank loans to non-financial corporations continued to moderate across countries, as reflected in monthly flows. The slowdown in the growth of lending reflected firms' substantial liquidity buffers but also the continued postponement of fixed investment and a perceived tightening of credit standards. 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.

Turning to fiscal policies, according to the March 2021 projections, the 2020 budget deficit was expected to be smaller than foreseen in the December 2020 projections due to better economic developments and less need for support than previously expected. As partly anticipated, a sizeable additional stimulus was foreseen for 2021 in response to new lockdown measures. Nonetheless, the budget balance was projected to improve over the forecast horizon - from a deficit of 7.2% in 2020 to a deficit of 2.4% in 2023. This reflected not only a fiscal pull-back stemming from the winding-down of pandemic-related measures but also the reaction of automatic stabilisers and improvements linked to low interest rates.

Monetary policy considerations and policy options

Summing up, Mr Lane noted that, while the overall economic situation would improve throughout 2021, uncertainty in the euro area remained high, owing in particular to the persistently high rates of COVID-19 infection, the spread of virus mutations and the speed of vaccination campaigns. While the rebound in

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