ECB’s Lagarde: No Psychological Obstacle to Stocking Up PEPP

18 May, 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank faces “no psychological obstacle” to increasing the size of its €750-billion Pandemic Emergency Purchase Programme (PEPP), ECB President Christine Lagarde said on Monday.

The ECB has to act whenever financial conditions threaten to tighten and the transmission of its policy is just as important as the policy, she said in an interview with four major European newspapers, according to a text made available by the ECB.

The economic fallout from a second wave of the pandemic would probably not be as serious as with the first wave, she told France’s Les Echos, Italy’s Corriere della Sera, Germany’s Handelsblatt and Spain’s El Mundo.

The PEPP “seems the most appropriate tool” for countries that need support, she said, leaving little reason to doubt that the ECB, as widely speculated, would decide on an increase in the programme at its June 4 monetary policy meeting:

“On this topic, we have been very clear and we continue to be very clear – we will not hesitate to adjust the size, duration and composition of the PEPP to the extent necessary,” she said. We will use all the necessary flexibility within our mandate. There is no psychological obstacle to our action.”

Monetary policy has to be as accommodative as necessary to stabilise an economy in recession and inflation seen falling short of the ECB’s price-stability definition over the coming years, she said.

“We have to act whenever a risk emerges of a tightening in financial conditions”, which implies proper transmission of the ECB’s measures, she said.  If monetary policy isn’t getting through to a particular country, the country “of course” deserves support, she said. “The transmission of monetary policy is just as important as monetary policy itself.”

The worst-case scenario with respect to growth involves a GDP decline of 15% this quarter, she said, noting the uncertainty related to a potential second wave of the pandemic.

“But one thing seems likely: if there is a second wave, it probably won’t be as bad as the first one from an economic point of view because we will be able to benefit from experience,” she said.

Lagarde estimated that funding the response to the crisis would cost European governments between one and one and a half trillion euros just this year, and said that some countries “will need European financial solidarity”.

Asked whether countries in need could count on the support of the Outright Monetary Transactions (OMT) program, under which the ECB can buy a euro area member state’s sovereign debt on the secondary market, Lagarde said this was not “the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19”.

Franco-German proposals for a European recovery fund are “ambitious, targeted and, of course, welcome”, she said.