Lagarde comments at ECB press conference

(Reuters) - The European Central Bank beefed up its bond-buying programme on Thursday in its latest effort to support a euro zone economy pummelled by more than two months of shutdowns to cope with the coronavirus pandemic.

Following are highlights of ECB President Christine Lagarde’s comments at a news conference after the policymeeting.

UNPRECEDENTED CONTRACTION

The euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it.

TEPID IMPROVEMENT

While survey data and real-time indicators for economic activity have shown some signs of a bottoming out alongside the gradual easing of the containment measures, the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding months.

SECOND-HALF REBOUND

The June Eurosystem staff macroeconomic projections see growth declining at an unprecedented pace in the second quarter of this year before rebounding again in the second half, crucially helped by the sizable support from fiscal and monetary policy.

SUBSTANTIAL REVISION

The projections entail a substantial downward revision to both the level of economic activity and the inflation outlook over the whole projection horizon, though the baseline is surrounded by an exceptional degree of uncertainty.

SUBDUED PRICE PRESSURE

While headline inflation is suppressed by lower energy prices, price pressures are expected to remain subdued on account of a sharp decline in real GDP and the associated significant increase in economic slack.

DEPRESSED INFLATION EXPECTATIONS

Over the medium term, weaker demand will put downward pressure on inflation, which will be only partially offset by upward pressures related to supply constraints. Market-based indicators of longer-term inflation expectations have remained at depressed levels.

SMOOTH POLICY TRANSMISSION

The Governing Council is determined to ensure the necessary degree of monetary accommodation and a smooth transmission of monetary policy across sectors and countries.

RAPIDLY DETERIORATING LABOUR MARKET

The latest economic indicators and survey results confirm a sharp contraction of the euro area economy and rapidly deteriorating labour market conditions.

The coronavirus pandemic and the necessary containment measures have severely affected both the manufacturing and the service sectors, taking a toll on the productive capacity of the euro area economy and on domestic demand.

SECOND-HALF REBOUND

The June Eurosystem staff macroeconomic projections see growth declining at an unprecedented pace in the second quarter of this year before rebounding again in the second half, crucially helped by the sizable support from fiscal and monetary policy.

BOTTOMING-OUT

Most recent indicators suggest some bottoming-out of the downturn in May as part of the economy gradually reopens.

Q3 REBOUND

Euro area activity is expected to rebound in the third quarter as the containment measures are eased further, supported by favorable financing conditions, an expansionary fiscal stance, and a resumption in global activity, although the overall speed and scale of the rebound remains highly uncertain.

CRUCIAL FACTORS

The extent of the contraction and the recovery will depend crucially on the duration and the effectiveness of the containment measures, the success of policies to mitigate the adverse impact on incomes and employment, and the extent to which supply capacity and domestic demand are permanently affected.

JUNK BONDS

“We have defined parameters for our purposes.”

“We want to avoid self-fulfilling pro-cyclicality.”

“The Governing Council has not discussed this matter.”

GERMAN CONSTITUTIONAL COURT RULING

The ECB is subject to the jurisdiction of the Court of Justice of the European Union. Our PSPP (Public Sector Purchase Programme), which was the subject of the Karlsruhe court ruling, has been judged by the Court of Justice of the European Union as in line with our policy mandate.

So we have, all of us, have taken note of the judgement by the Karlsruhe court, which is directed at two parties, the German government and the German parliament, and we are confident that a good solution will be found which will in no way compromise the independence of the ECB, the primacy of European Union law and the decision by the Court of Justice of the European Union.

APPROPRIATE SIZE

Obviously, there was a debate within the Governing Council as to what would be the appropriate size, but we collectively determined that 600 billion euros should bring us over time significantly closer to what I have called the pre-COVID inflation path while allowing us to monitor how some key developments unfold in the coming months that will indeed impact our policy.

We will understand a little better how the economy rebounds in the third quarter and then later on in the course of the coming months to have a bit more clarity.

We will have better data and numbers and we can come up with more reliable scenarios and projections, but it is still surrounded by a lot of uncertainty. We believe that will bring us significantly closer to that path of the pre-COVID inflation.

DOWNSIDE RISKS

Overall, the Governing Council sees the balance of risks around the baseline projection to the downside.

LEVERAGING PEPP

We are confident that combining all the tools that we have in our toolbox, leveraging PEPP as we do under the decisions that we have made today, we will actually serve both aims that we are pursuing, that is to make sure that credit flows through the economy and that we return to the inflation path that we had pre-crisis so that we can deliver on our price stability mandate.

UNANIMOUS ON ACTION

I can assure you that there was an unanimous view in the Governing Council that action had to be taken. In the face of that inflation outlook and given our mandate of price stability, action had to be taken.