ECB’s de Guindos: We Have Deflationary Pressures We Have to Deter

22 June 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s decisions are driven by its price stability mandate and it currently has to counter deflationary tendencies, ECB Vice President Luis de Guindos said Monday.

In an interview with German newsweekly Der Spiegel, de Guindos, according to a text provided by the ECB, said he could not rule out another extension of the pandemic emergency purchase programme (PEPP).

Noting the weak inflation and growth projected by the ECB’s staff forecasts, de Guindos insisted that the ECB’s measures did not reflect a desire to conduct monetary financing, but were instead intended to ‘promote economic growth, achieve our inflation target and prevent fragmentation in the euro area, a too strong tightening of financing conditions in euro area countries.’

Only the ECB’s mandate matters, and on that basis, given the deterioration of output and inflation, ‘we had to act’, he said. ‘…in the present juncture, as in 2015 and 2016, we have deflationary pressures that we have to deter’, he warned.

Still, he affirmed, there is ‘no reason why inflation shouldn't increase again’ after the pandemic has ceased to depress global demand and energy prices. Indeed, he added, on-shoring and value chain disruptions could boost inflation.

Although the PEPP’s flexibility means that the distribution of government bond purchases across the euro area can deviate from the key used to calculate national central banks’ respective share of the ECB’s capital, benefitting countries like Italy that need more support, ‘in the end … [w]e will ensure convergence to the capital key’, de Guindos vowed.

In response to the assertion that there would be no end, he said he could not foresee what would occur and thus ‘cannot rule out extending the programme’. Although circumstances obliged the ECB’s to retract its 2018 decision to cease net purchases of sovereign debt, he said, ‘if the situation improves and the inflation outlook robustly converges to a level which is in line with our mandate, we can return to exit mode.’