ECB’s Costa: ‘Nice Idea’ Not to Use up Entire PEPP Envelope

17 July 2020

By David Barwick – FRANKFURT (EconoStream) – Making fewer purchases than the volume of the European Central Bank’s pandemic emergency purchase programme (PEPP) would allow is a ‘nice idea’ that would reinforce the ECB’s credibility, ECB Governing Council member Carlos da Silva Costa said Friday.

In an interview with OMFIF, Costa, according to a text made available by the Bank of Portugal, which he heads, said that yield curves suggest markets expect monetary policy transmission to work without a problem.

Asked about the possibility that the ECB would not use the €1.35 trillion allotted to purchases under the PEPP, he responded, ‘It is a nice idea, because it means that we were credible in what we are doing. Our objective is to do what is necessary to avoid fragmentation of the monetary union.’

He added: ‘If we look at the yield curves, we see them behaving in a way that shows that markets are confident that we can transmit our monetary policy without any difficulties.’

At Thursday’s press conference following the Governing Council’s monetary policy decision, ECB Christine Lagarde said that ‘unless there were significant upside surprises, our baseline remains that we will use the entire envelope of the PEPP.’

It’s positive if observers feel the Governing Council went beyond what was necessary in expanding the PEPP’s volume by €600 billion last month, Costa said, ‘because this means that they are confident that there will always be action in the market. It’s important that people are confident that there will be no lack of intervention, if needed.’

Costa sidestepped the question of what would be an unacceptable spread, asserting instead that the ECB was simply ‘trying to determine whether the yield curve is the result of normal market functioning or is it the result of mistrust.’ Only in the latter case, he said, does the ECB have to act.

Proper monetary policy transmission is necessary for price stability, implying the need to mitigate the two risks transmission faces, Costa said, these being ‘overall fragmentation, and monetary and banking transmission.’

‘We need to act on the two, to meet the final goal that is ensuring inflation will go up’, he elaborated. ‘This requires a repaired economy with employment and economic growth. There is no nominal stability if there is no transmission of monetary policy. And if there is no transmission of monetary policy, there will be no recovery. And if there is no recovery, there will be no revival.’