ECB chief economist Philip Lane said in a speech over the weekend, “there is a clear risk of self-fulfilling adverse dynamics taking hold through which uncertain economic prospects induce households, firms and governments to hold back on expenditure plans, leading to a decline in overall demand that validates the loss in confidence about the future.”
The risk is “compounded by the danger of real financial amplification channels by which lenders (banks or bond investors) become reluctant to lend and borrowers (households, firms or governments) become reluctant to take on debt because they fear that lower growth prospects would be amplified by declining creditworthiness and a tighter credit supply.”
Hence, “it is essential that the ECB acts as a stabilising force and boost confidence by committing to the preservation of favourable financing conditions.” The commitment is delivered through the “full set of monetary policy instruments, including low policy rate and forward guidance, the APP asset purchase program, the PEPP pandemic emergency purchase program, the calibration of the TLTRO III, and the collatural policies.
