ECB’s de Cos: PEPP Duration Depends on Financing Conditions, Inflation

15 March, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pablo Hernández de Cos said Sunday that the eventual duration of the ECB’s pandemic emergency purchase programme (PEPP) depended on the state of financing conditions and the outlook for inflation, but that the eventual ending of purchases would be manageable.

In an interview with Spanish daily El Mundo, de Cos, who heads the Banco de España, said that ‘[i]n a context where the macroeconomic picture is similar to that of three months ago, with a medium-term inflation forecast that is far from our target and below that anticipated before the crisis, we believe that a tightening of financing conditions is not appropriate because it could hinder the economic recovery.’

The ECB’s decision last week signalled the use of the flexibility of the PEPP to ensure favourable financing conditions, he said.

‘We have had to calibrate the execution of the programme to what we were seeing in the financial markets’, he added. ‘This is particularly important in order to continue to give fiscal authorities in all euro area countries, including of course the Spanish authorities, room for manoeuvre to continue to deploy the income support measures for households and firms that are still needed.’

How long the PEPP continues will depend on ‘the evolution of the macroeconomic outlook, in particular inflation and financing conditions’, he said. As regards an exit when the time comes, he said, ‘it is not unmanageable, far from it.’

De Cos concurred that the default rate would increase, but argued that banks had prepared for this. ‘At this point in the crisis, we must continue working to prevent what was initially a liquidity problem for many companies from becoming a solvency problem’, he said. ‘We must identify the problems of indebtedness, but without supporting zombie companies whose demand is not going to be reduced temporarily but structurally.’

As for the economic outlook in Spain, growth the first quarter of this year would be worse than anticipated owing to the ongoing impact of the pandemic, and could even be negative, he said.

‘But beyond the specific numbers, the important message is that the recovery in the previous and current quarter has slowed down very significantly, so that we are still a long way from pre-crisis GDP levels’, he added.

Indeed, Spanish growth projections for the entire year will probably be subject to ‘a slight downward revision … because of the deterioration observed in the first part of the year’, he said.

The ‘more intense recovery’ expected from the second half depends greatly on progress in vaccination, he said.

Asked when pre-pandemic levels of activity would be regained, he replied, ‘For the euro area, we expect it by mid-2022. For Spain, we move to 2023 the point at which the Spanish economy will recover to the levels of 2019 in our central scenario.’