ECB Monetary Policy Meeting Accounts: PEPP continued to be more efficient than a rate cut in current pandemic conditions characterised by high uncertainty

The ECB released account of its 9-10 December 2020 monetary policy meeting. It noted that:

• Incoming data and the Eurosystem staff projections suggested more pronounced near-term impact of the pandemic on economic activity and inflation than previously envisaged;
• Market sentiment had improved notably following the news of successful development of vaccines and on account of expected monetary policy measures;
• It was cautioned that uncertainty remained high and positive sentiment could erode quickly in the event of negative news;
• It was widely considered an appropriate and proportional response to prevailing type of shock to increase horizon of net purchases under PEPP until March 2022, extend reinvestments of principal payments from maturing securities purchased under PEPP until the end of 2023, and to add more TLTRO III operations, extending the pandemic-related low interest rate period to June 2022;
• It was agreed that proposed longer horizon of PEPP and TLTRO III was broadly in line with expected duration of the pandemic crisis, continued uncertainty about roll-out of vaccines, and expected return of economic activity to its pre-pandemic level;
• It was also agreed that, on balance, benefits of PEPP purchases and the TLTRO III outweighed the potential costs;
• A more moderate increase in PEPP envelope was advocated by number of members; however, some arguments were also made in favour of larger envelope;
• Concerns were voiced over risks related to developments in exchange rate that might have negative consequences for inflation outlook