In an interview with Italian daily Corriere della Sera, Fabio Panetta, member of the Executive Board of the European Central Bank, answered questions on market conditions.
Q: Can you explain what you decided last Thursday, because the markets didn’t really understand it at first. The Italian stock market fell by 17% –
A: Last Thursday we reduced the cost of funding for banks, provided that they, in turn, pass on that funding to firms and households – effectively, we further reduced the cost of lending to the economy. We took measures aimed at easing the eligibility criteria for the assets used by banks as collateral in our refinancing operations. We have not, so far, reduced the interest rate on the deposit facility (the rate which is currently relevant for monetary policy, and which is below zero); however, further cuts would be possible if warranted by the economic outlook.
Q: And on government bonds?
We increased our asset purchase program by €120 billion, which will allow us to address tensions in the government bond markets. In the course of this year, we will make net purchases totaling €360 billion. If necessary, this program could be expanded again. The turbulence seen in the Italian government bond market in recent days is undesirable and needs to be allayed. Large, unwarranted increases in spreads, caused by the grave health crisis – which risk fragmenting the euro area government bond market and undermining the transmission of monetary policy – will be addressed decisively. The package of measures that we adopted this week allows us to act flexibly in terms of both the pace and the composition of our asset purchases, meaning that we have the possibility to focus our efforts on asset classes and countries that come under pressure.
Q: At a time of heightened market sensitivity, seeing the possibility of purchasing corporate bonds open up has created the impression that the ECB is less focused on purchasing sovereign bonds.
A: This is a misperception. The asset purchase program was relaunched by the Governing Council in September, when Mario Draghi was President, and has been expanded in recent days under the presidency of Christine Lagarde. It is a necessary tool to bolster the effectiveness of monetary policy when there is less room to use the traditional interest rate tool. The purchases involve both public and private sector bonds, with the aim of facilitating the achievement of the price stability objective. But, in fact, the operations primarily involve public sector bonds, which represent over 80% of purchases carried out thus far.
Q: There is a lack of liquidity in the economy and this problem will become increasingly acute. These sales on the financial markets are aimed at selling bonds to obtain liquidity.
A: I am obliged to be boring: we have all the necessary tools, we are using them decisively and are able to do even more. At present our monetary policy operations ensure unlimited liquidity for the banks. Liquidity stress could emerge among non-bank intermediaries. If necessary for the conduct of monetary policy or to safeguard the stability of the financial system, the Governing Council could consider whether and how to expand the list of intermediaries that can be supplied with liquidity and the rules for participating in our refinancing operations.