ECB Meeting Account Shows Divergence of Views on PEPP Increase

14 January, 2021

By David Barwick – FRANKFURT (Econostream) – The account of the European Central Bank’s policy meeting of 9-10 December, released by the ECB on Thursday, indicated that the centrepiece of the Governing Council’s array of measures at the time was a compromise between those who wanted to do more and those who argued for less.

According to the account, the Governing Council was unanimous on the need to act to maintain favourable financing conditions, with the downward revision to inflation forecasts and the risk that expectations would dis-anchor seen as justifying ‘decisive action’.

However, it was felt that ‘[t]he current environment warranted a recalibration of policy instruments to safeguard favourable financing conditions, rather than the adoption of additional measures to combat the crisis.’

In discussing concrete steps, ‘[t]he expansion and extension of PEPP [pandemic emergency purchase programme] purchases and the recalibration of the TLTRO [targeted longer-term refinancing operation] III conditions were widely seen as the most suitable tools to ensure that financing conditions remained favourable throughout the pandemic’, according to the account.

In view of the PEPP’s flexibility, it ‘was seen as cornerstone of the Governing Council’s monetary policy package’ and its expansion by €500 billion ‘was generally seen as appropriate’, though the account made clear that there were dissenters.

‘A more moderate increase in the PEPP envelope was advocated by a number of members based on the argument that significant space for purchases was still available from past decisions and that in an environment of high uncertainty it was worth “keeping some powder dry” by maintaining the option to further adjust the envelope in the future’, it said.

At the same time, there were those who felt that €500 billion was not enough, the account reported, especially given that the €120 billion by which the asset purchase programme (APP) had been stocked up last 12 March (part of the ECB’s initial response to the pandemic) was only for use to the end of 2020.

The account suggested that the PEPP’s flexibility may have been a key factor in convincing the Council to settle on €500 billion. In particular, a consequence of the flexibility was that calibrating monthly purchases on the basis of market conditions so as to keep financing conditions favourable would, in conjunction with ‘forceful communication’, allow the central bank ‘to reduce the pace of purchases while having an equivalent effect on financing conditions.’

‘This could result in greater efficiency and in using less than the entire envelope over the duration of the programme’, the account said. ‘At the same time, it was seen as essential for the Governing Council to state that it stood ready to increase the envelope further if needed.’

Conversely, the Council conceded the possibility of not exhausting the full envelope allocated to the PEPP if there were no need.

For future communication, Council members considered important the acknowledgment of the positive vaccine news and the resultingly less pronounced, though still mainly downside risks. This, it was felt, needed to be put into proper context by highlighting the deviation of projected inflation from the ECB’s target, and by avoiding perceptions of complacency about inflation.

‘Furthermore, the Governing Council needed to announce that it would carefully monitor whether its measures were sufficient to guarantee a return of inflation to its aim, and to reiterate that it stood ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner, in line with its commitment to symmetry’, the account reported. ‘This could also include possibly cutting the deposit facility rate. The Governing Council would also continue to monitor the effects of the exchange rate on the inflation outlook.’