ECB’s Mersch: If Financial Tensions Ease, No Need to Exhaust PEPP

25 June, 2020

By David Barwick – FRANKFURT (EconoStream) – Were financial market tensions to dissipate sufficiently, the European Central Bank would not need to deploy the full scope of its pandemic emergency purchase programme (PEPP), ECB Executive Board member Yves Mersch said Thursday.

In remarks at the Reinventing Bretton Woods Committee Webinar Series, Mersch, according to a text provided by the ECB, said that the PEPP must remain a temporary measure precisely because of its flexibility.

The PEPP’s flexible design corresponds to the currently elevated level of uncertainty in that purchase flows can be adjusted to suit contingencies of the ongoing crisis, ensuring that the programme remains an effective market stabilisation tool, he said. ‘At the same time, we would not need to make use of the full PEPP envelope if the Governing Council were to assess that market tensions had eased sufficiently’, he added.

The PEPP also contributes to getting inflation back to its pre-pandemic path, Mersch said. However, the risk that the programme could lead to monetary financing is one of the ‘constitutional red lines that monetary policy cannot cross’, he warned. ‘On account of its flexibility, the PEPP must remain a temporary crisis instrument’, he said.

The ECB’s public sector purchase programme (PSPP), a part of the asset purchase programme (APP) decided on in January 2015, ‘will continue to be the main instrument of our policy stance’, he said.

Under the PSPP, national central banks, in line with the key used to calculate their respective share of the ECB’s capital, and the ECB buy on the secondary market debt issued by euro area central governments, agencies and European institutions. The ECB emerged from exit mode to restart net purchases under the PSPP last November.

The PSPP observes issue share and issuer limits that limit the risk of the ECB assuming a dominant role in the financing of European sovereigns, Mersch observed. Still, the ECB is aware that its swollen balance sheet can impair proper market functioning, he said.

Mersch allowed that ‘the short-term economic impact of the crisis is substantial and requires ample monetary policy support’, but suggested that ‘the longer-term outlook is much less certain.’ For now, price stability is ‘the focus of our policy measures’, he said.