May 1, 2020 / 9:41 AM / a month ago

UPDATE 1-ECB here to close spreads after all, Lane says as economy shrinks

(Combines Lane, forecasts)

FRANKFURT, May 1 (Reuters) - It is a “basic task” of the European Central Bank to contain borrowing costs for more indebted euro zone governments during a crisis like the coronavirus outbreak, the ECB’s chief economist said on Friday.

Philip Lane’s words completed a turnaround in the ECB stance since President Christine Lagarde said in March it was not her job to “close spreads” between government bond yields, before quickly reversing herself amidst a financial and political backlash.

His comments were likely to cement market expectations for an expansion of the ECB’s 1.1 trillion euro asset purchases to curb borrowing costs for indebted governments, such as Italy, struggling with the fallout of the coronavirus crisis.

“Such non-fundamental volatility in spreads impairs the smooth transmission of monetary policy across countries and it is a basic task for the central bank to counter such destabilising force,” Lane said in a post on the ECB website.

He said the size of the ECB’s Pandemic Emergency Purchase Programme, currently capped at 750 billion euros, was “a key factor”, along with its flexibility - a likely reference to the ECB’s oversized purchases in Italy and Spain.

The ECB said earlier on Friday it expected the euro area’s economy to shrink by as much as 15% percent this quarter before “a protracted and incomplete recovery” over the rest of 2020.

But the ECB cautioned that uncertainty surrounding the containment of the virus meant that, under its most pessimistic scenario, GDP could remain “well below” the level observed at the end of 2019 for as long as two more years.

Commenting on forecasts, Lane said: “It is critical that financing conditions remain highly accommodative, so that households and firms are not only able to weather the impact of lockdowns but can also obtain funding on favourable terms to finance consumption and investment once we enter a recovery phase.” (Reporting by Francesco Canepa Editing by Mark Heinrich)

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