ECB’s Lagarde: Slowed Down PEPP Buys, But Still Plan to Use in Full

16 July, 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s implementation of its Pandemic Emergency Purchase Programme (PEPP) has decelerated somewhat in light of an improved environment, but the ECB still intends to deploy the full envelope, ECB President Christine Lagarde said Thursday.

Taking questions at the press conference following the ECB’s monetary policy decisions, Lagarde expressed pleasure with the take-up at the first allotment of the third series of targeted longer-term refinancing operations (TLTRO III) and more generally with the impact of ECB policy measures taken since March.

Purchases under the PEPP have ‘slowed down a little bit because financial markets are more stable’ and ‘fragmentation risk has really significantly been reduced’, she said.

However, she noted, in addition to reducing fragmentation risk, the PEPP’s dual function also includes reinforcing the overall monetary policy stance, the need for which ‘is still around’ and ‘we still need to address’. With that in mind, she said, barring ‘significant upside surprises, our baseline remains that we will use the entire envelope.’

The total volume of the PEPP is €1.35 trillion, its original €750bn volume when announced on March 18 having been stocked up by €600bn at the Governing Council’s monetary policy meeting last month.

With respect to last month’s TLTRO III allotment, Lagarde said the ‘major, major takeup of the TLTRO’ was ‘a great, great success’.

‘We asked ourselves why is it so successful, and clearly it has to do with the attractive terms’, she said. Additional contributing factors were the existence of demand and the absence of any stigma attached to banks’ participation, she said.

In view of the goals of TLTRO III to support the economy and ensure the availability of financing to firms and households, the measure has been ‘vastly successful’ and ‘seems to have met the purpose’, she said.

Lagarde claimed that the result of €1.31 trillion published on June 18, the first TLTRO III allotment since the ECB eased conditions on April 30, had been ‘way above market expectations’. Many observers had anticipated a somewhat better outcome, with ECB Executive Board member Isabel Schnabel having said the previous week that ‘surveys point to significant take-up for TLTRO [] III, in the order of €1.4 trillion’.

Still, Lagarde said today of the ECB’s monetary policy approach, taking into account the TLTROs, the PEPP and all the other measures, indications were ‘that it’s effective, it’s adequate and it’s working.’

Asked whether the ongoing high growth in new Covid-19 cases in the U.S. was a concern for the economic outlook here, she replied, ‘In terms of impact on our own forecast and our own scenario, clearly we have taken into account the environment in which the euro area operates’, so that the ECB’s baseline does already ‘take those elements into account.’

Although purchases of sovereign debt made under the PEPP will converge to the key used to calculate national central banks’ respective share of the ECB’s capital ‘at some stage’, she said, Lagarde was clearly more interested in touting the programme’s flexibility than in promising eventual capital key convergence.

‘[F]rankly, flexibility has served us extremely well’, she said. The capital key is the ‘benchmark’, the flexibility the ‘key principle that distinguishes PEPP’ from the ECB’s other asset purchases programmes, she said.

The ECB’s ‘experience with the two-tier system has been very positive’, Lagarde affirmed. She struck a cautiously optimistic tone when queried about the potential for a banking crisis. Although it is ‘clear that we have to be very attentive and we have to monitor very carefully’ cliff risks as well as the link between banks and weak corporates, banks are stronger than they were, she asserted.

In her introductory statement, she noted that incoming data showed economic activity resuming from a depressed level and amid a ‘highly uncertain’ outlook. Inflation, she said, would remain ‘very subdued’. Overall risks to growth remain tilted to the downside, she said.

‘Against this background, ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability’, she said. The ECB stands ready to adjust its measures as warranted ‘to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.’