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INTERVIEW

Q&A on Twitter

Interview on Twitter with Isabel Schnabel, Member of the Executive Board of the ECB, conducted and published on 9 June 2020

9 June 2020

Good afternoon, this is , Executive Board member . I’m here to answer your questions for the next 45 minutes. Please use to join the conversation.

Why do you continue to use and expand QE, given that it has been a massive contributer to wealth inequality over the past decade?

Schnabel: Empirical evidence does not support this statement. #QE has even slightly reduced wealth inequality in the euro area, see https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2190.en.pdf

if your inflation goal overshoots and we have a inflation of about 3% or more. Will you increase interest rates and stop QE? What would be the consequences for italy and indebted companies?

Schnabel: We counter too high as well as too low inflation in a symmetric way. By focusing on the medium term, we can adjust the speed of returning to our inflation aim, thereby mitigating the side effects of our measures, including on member states, firms and households.

: why is the holding so much gold?

Schnabel: The Eurosystem currently holds around 9% of its balance sheet in the form of gold and gold receivables: https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst200602.en.html. Gold is an important foreign reserve asset that is held for liquidity and risk diversification purposes.

Do purchase programmes, especially those that essentially target spreads (like the PSPP envelope or PEPP), delay or prevent economic reforms in member states, especially in low growth/high debt states? If not, why?

Schnabel: There is no evidence that our purchase programmes have delayed economic reforms. In the COVID-19 crisis, fiscal & monetary policy are complementary. Our policies support reform efforts through their beneficial effect on funding costs.

Why are you allowing zombie companies to survive ? They are not productive and suppress long term growth, aren’t they?

Schnabel: Our policies primarily support healthy and promising firms. The share of unviable firms has declined in many countries. Bank health matters more for firm quality than monetary policy, see https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2240~61e2d9dfec.en.pdf.

Could you discuss whether changes to the dual rate system of TLTROs & Deposit Tiering could become the primary policy tool while the Deposit Facility Rate remains negative?

Schnabel: The negative deposit facility rate lowers funding costs for the whole economy. Offering more attractive conditions in TLTROs is an effective way to foster bank lending to households and firms. The tiering system reduces side effects on bank profitability.

Christine Lagarde talked about being ahead of the curve with stable coins. Can you expand on what that means and looks like in practice?

Schnabel: We proactively monitor current developments in the area of stablecoins, assessing regulatory and financial stability implications: https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202005_1~3e9ac10eb1.en.html. At the same time, we are open to innovation, including in the area of digital currencies.

Are you discussing measures to enable deep neative rates at the board (eg the suggestion of Agarwal/Kimball) and what is your view on deep negativ rates as an alternative to QE?

Schnabel: Currently, we consider asset purchases to be a more effective and efficient tool, also taking potential side effects into account. But our experience with negative interest rates has been positive, and lowering interest rates remains an option for the future.

What kind of data would make you reconsider the fact that QE actually boosts inflation instead of the opposite?

Schnabel: This question has to be analysed by comparing actual inflation with a counterfactual situation without QE. Based on empirical data, our analyses show that the effect of QE on inflation has been positive, see https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2346~dd78042370.en.pdf

“Power tends to corrupt, and absolute power corrupts absolutely.” How is the ECB’s power limited - and by whom? (I assume we can agree that the soft reporting requirements towards the EU parliament do not suffice as answer.) Thank you.

Schnabel: We have a clear mandate – price stability –, which is laid down in the Treaties. We are subject to the jurisdiction of the European Court of Justice. And don’t underestimate our accountability towards the European Parliament, which is actually quite important.

Everyone knows that most of the money is not coming to the consumers. Instead the biggest part end up at the markets where the bubbles are growing even bigger. So is there a real plan to do something for the economy or are all your actions only for making the rich even richer ?

Schnabel: I beg to differ. Our measures have been beneficial for consumers as they contributed to higher wages and created jobs. Income inequality has even decreased, as poorer households have benefited more from the positive employment effects.

How are you ever going to normalise or will you just keep digging deeper and deeper until it all comes crashing down?!?

Schnabel: Our monetary policy actions are guided by our price stability mandate. We will adjust our measures when medium-term inflation recovers in a sustainable way, always taking into account the risks to financial stability and other potential side effects.

Why ECB uses debt financing instead of monetary financing for covid recovery? Article 123.1of TFEU can be temporarily suspended to allow monetary financing and to avoid austerity in the future. It is not possible to repay debts, because the money to pay interests is never issued.

Schnabel: The prohibition of monetary financing is a cornerstone of our monetary system that ensures monetary stability. The ECB’s policies support economic growth and employment by providing favourable funding conditions throughout the euro area.

Dear , as the assessed the climate impact of its response and operations in general? What are the plans to integrate climate, before and during the strategic review?

Unfortunately time is at the essence…

Schnabel: Climate protection is a key topic in our monetary policy strategy review, which will be resumed shortly. We will analyse the role of climate change for our economic models, investment portfolios, risk assessments and monetary policy operations.

Hi we had a for you the other day about the exact guidance given to NCBs by the ECB executive board for the asset purchases (in term of maturity, etc.) thanks!

Schnabel: In national central banks receive guidance about the amounts to be purchased, guided by the capital key but with flexibility. With respect to maturities, purchases are guided by market neutrality. Therefore they also depend on issuance behaviour.

During the COVID crisis, the ECB has allowed banks to use their own internal rating models for certain assets in order to obtain liquidity from the ECB. Don't you think it's against Governance that customers mark the quality of their own assets for external purposes?

Schnabel: Internal models are a well-accepted tool in banking supervision. To mitigate incentive problems, supervisors carefully check these models. The acceptance of internal ratings is a temporary measure to relieve the strains from the COVID-19 pandemic.

Why is inflation so important to you?

Schnabel: What is important to me is price stability. Both too high and too low inflation can lead to high costs for society. That’s why we are mandated by the Treaty to keep prices stable. In recent years, inflation has been too low and is projected to fall even further.

How long before cash is banned to enable interest rates to go deep into negative?

Schnabel: Cash continues to be very popular in the euro area, with some differences across member states. We are always ready to explore innovations like digital currencies, but there is no intention to abandon cash.

How do you think about national ACC's, which lead to a renationalisation of monetary policy, might be used as an instrument of national economic policy to ease banks's lcr fulfillment and hence might lead to a race to the bottom in collateral acceptance?

Schnabel: The expansion of the ACC framework is a temporary response to the pandemic, which allows banks to make full use of our liquidity operations, so they can continue lending to the real economy. See our recent blog post on collateral https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200422~244d933f86.en.html

What is your view about the possibility of the monetary policy regime adjustment towards the history-dependent regimes (i.e. PLT, AIT, etc)? Or what do you see as the biggest challenges for such a change?

Schnabel: The advantages and disadvantages of price level targeting and average inflation targeting are going to be considered in the context of our monetary policy strategy review. As President Lagarde said: “We will not leave any stone unturned.”

Is there a limit to which the ECB’s asset purchases can deviate from the capital key? If so, what is it? Thank you

Schnabel: Our public sector asset purchases are guided by the capital key. Our pandemic emergency purchase programme (PEPP) offers the flexibility to deviate from the capital key as required to ensure a smooth transmission of our monetary policy to the entire euro area.

What methods does the ECB employ to ensure intellectual diversity in monetary thinking?

Schnabel: Our staff is intellectually and culturally diverse, and we encourage open discussions within the institution. Broad external interaction with economists with diverse backgrounds ensures full exposure to different streams of monetary thinking.

What would you consider as a 'success' in terms of TLTRO-III take-up next week?

Schnabel: Given the favourable pricing, we expect a sizeable take-up next week (allotment on Thursday, 18 June). The TLTROs are successful if banks use the funds to grant loans to the real economy.

Don't you think that the ECB needs a different and probably wider mandate from the European Parliament in order to cope with the expected and unexpected in the next decade? I guess you might be unwilling to answer this question because it is wholly political.

Schnabel: This is indeed a political question. Note, however, that our mandate already includes aspects like full employment and the protection of the environment, as long as these do not stand in conflict with our primary objective of price stability.

Warum spricht Frau Schnabel nicht mit den Bürgern, wenn man fragen zur aktuellen Euro Politik hat?

Schnabel: Aber genau das mache ich doch gerade. Mir ist die Kommunikation mit den europäischen Bürgerinnen und Bürgern sehr wichtig. [But this is exactly what I am doing. Communication with the European citizens is very important to me.]

A question related to the HICP (HVPI). Why do you add certain products to the HICP, which does not reflect the real inflation rate? Instead you reject goods with big price increases. In my opinion you are manipulating the inflation rate in the way you want it to be.

Schnabel: This claim is not correct. The HICP used by is calculated by , the statistical office of the European Union. Some prices like food have increased more strongly recently, which can give the impression that prices rise faster than they do.

The PEPP Program will have an volume of €1.35 Billion. Two questions:

1. Where does the money for PEPP come from?

2. With @Lagarde the ECB wants to be more transparent. Why is it than a secret what the PEPP is buying? Please share iwith us.

3. What’s the exit plan?

Schnabel: On question 2: Transparency and open communication are important strategic priorities for the . purchases are not a secret. We publish granular information on these purchases on a bimonthly basis, most recently in early June: https://www.ecb.europa.eu/mopo/implement/pepp/html/index.en.html

it still makes sense today that the ECB’s main task is price stability?

Schnabel: Absolutely. Keeping prices stable preserves the purchasing power of European citizens and supports investment and job creation by reducing uncertainty. This is particularly important in the current crisis.

2 related Q's, if you kindly will.

How would you explain the fact that centrals, here or abroad, continually conjure preposterous amounts of fiat currency without triggering significant inflation? Has ECB identified the cause of failure?

Schnabel: Monetary policy has raised inflation. But structural factors like globalisation, lower growth in energy prices and changes in competition weigh on inflation, requiring central banks to be more patient, as argued in a recent speech: https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200227_2~301776ff2a.en.html.

When assets are bought by the ECB. Do they yield the same interest income for the ECB? Why don't You report those earnings in the ECB meetings?

Schnabel: The ECB receives interest income on its asset holdings. Profits are distributed to the national central banks of the euro area, which are the ECB’s shareholders. The profits are reported in the annual accounts: https://www.ecb.europa.eu/pub/annual/annual-accounts/html/index.en.html.

ECB is the biggest buyer and holder of italien bonds. Soon the ECB will own everything.

How shall Italy ever pay those debts back? Why don’t write off all the debts of Greece, Italy...? Debt jubilee

Is this the end goal?

Schnabel: Our purchases are conducted in a way that maintains market functioning. This excludes holding everything. The prohibition of monetary financing is and will remain an important basis of monetary policy in the euro area.

Given that there are comparisons of the current crisis with the 2008/09 crisis and predict a "second wave" of economic pressure. Even though these crises are not fully comparable, there is a noteable probability for a second wave of CoViD-19. How can the ECB react again?

Schnabel: Our decisions since March 2020 have provided important support to the real economy. Should conditions deteriorate, we have the necessary tools at our disposal to react to any contingency, as we have done since the start of the crisis.

What effect do ECB policies have on asset prices? Do young people hold a lot of assets? Did young people with some access to capital found most modern tech companies? What policies could you implement to help young people in the tech industry to flourish in Eurozone?

Schnabel: An easing of monetary policy tends to raise asset prices, which lowers the costs of funding, including for equity. Especially start-up firms rely on functioning capital markets. The ECB is promoting the development of a European Capital Markets Union.

target inflation 2% is right in 2020?

Schnabel: The ’s inflation aim of below, but close to, 2% has served us well for the past 20 years. In our monetary policy strategy review, we will assess whether it remains appropriate for the future: https://www.ecb.europa.eu/home/search/review/html/index.en.html

Stop this irresponsible policy. How will you ever normalize??? What is your plan B ? No risk management. This is like the 20s. The ECB ruins the financial system

Schnabel: As all major central banks, we have responded to this unprecedented crisis by expanding our balance sheet. Further monetary policy decisions will be guided by our mandate of price stability. The will stop purchases when appropriate.

If the COVID19 triggered the economic depression, and many young people lost their work, what would be listed in the ECB’s agenda?

Schnabel: The current crisis will lead to an increase in unemployment. Those who are at risk of losing their jobs are likely to benefit most from our measures. This includes many young people.

Don't you fear a liquidity trap in Eurozone as it has been occurring in Japan?

Schnabel: No. We have ample evidence that our measures are effective in easing financing conditions in the economy. Our measures have supported economic growth and inflation.

Do the negative rates apply to total reserves or those in excess of the minimum reserves-to-deposits ratio?

Schnabel: To support policy transmission, we have introduced a two-tier system. This means that a multiple of banks’ minimum reserves are remunerated at the main refinancing rate (0%); the remaining excess reserves are remunerated at the deposit facility rate (-0.5%).

Would be interested to learn whether your stance on buying green bonds changed? Would you still caution against it? Thank you.

Schnabel: The Eurosystem holds close to 20% of the green bonds eligible for our corporate bond purchase programmes. Our purchases have lowered yields and supported issuance. The more green bonds are issued, the more we can buy.

According to the prices are currently rising to slow. There seems to be divergent views among the public and central banks regarding price inflation. How do you think the average person benefits, if their purchasing power falls at an even faster rate than currently?

Schnabel: Inflation is well below our aim of below, but close to, 2% and is expected to fall further due to COVID-19. Stable prices are crucial for the economy. Deflation would harm European citizens, including through lower wages and higher unemployment.

Time to wrap up. Thanks a lot for your questions – I really enjoyed the chat and look forward to doing it again soon. Take care!

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