ECB’s Panetta: Can Enlarge and Extend PEPP Yet Again, If Need Be

14 December 2020

By David Barwick – FRANKFURT (Econostream) – The European Central Bank can further increase the amount of money devoted to asset purchases and conduct these for longer than already foreseen, if inflation prospects justify doing so, ECB Executive Board member Fabio Panetta said Monday.

In a speech at the Rome Investment Forum 2020 , a text of which was made available by the ECB, Panetta warned that the euro’s appreciation could have a significant bearing on inflation.

‘The PEPP [pandemic emergency purchase programme] envelope can be further expanded and extended, if warranted by the inflation outlook’, he said. ‘And we stand ready to adjust all our instruments if downside risks to the outlook materialise, including those stemming from exchange rate dynamics. Indeed, an appreciation of the euro could significantly affect euro area inflation.’

Panetta asserted that there could be no question of the ECB tolerating inflation not in line with price stability, and that the central bank would do what was needed for medium-term inflation to converge to 2%.

By keeping financing conditions favourable, monetary authorities would ‘remove obstacles to fiscal policy’ during the coming months when ‘uncertainty is still high and the private sector is reluctant to take risks’, he said. In that way, fiscal policy could play the role of ‘the main actor in the stabilisation effort and, as such, a key channel for transmitting monetary policy to the real economy’, he said.

When the uncertainty subsides and the private sector transmits monetary policy more effectively, the continued favourable financing conditions to which the ECB is committed will encourage companies to invest, he said.

The weak outlook for inflation ‘means that financing conditions will need to remain very supportive even as growth accelerates from next year onwards’, he said. ‘As a result, monetary policy will become more accommodative relative to the growth outlook.’

Echoing his colleagues with respect to progress towards a medical resolution of the pandemic, Panetta said that ‘we are finally able to glimpse the light at the end of the tunnel’. Still, he said, ‘2021 will likely be a “pandemic year”, characterised by high uncertainty and widespread vulnerabilities among firms and households.’

Policy support needs to underpin the economy as it emerges from the pandemic, he said.