EXCLUSIVE: ECB’s Vasiliauskas: Increase in PEPP Purchases Temporary, But Hinges on Situation

22 March, 2021

- PEPP’s €1.85 Trillion ‘Should Be Enough’; Recalibration ‘Not on Our Agenda’
- U.S. Fiscal Stimulus Could Add 0.3 Point to EMU GDP, 0.15 Point to HICP

By David Barwick – FRANKFURT (Econostream) – The increase in asset purchases under the European Central Bank’s pandemic emergency purchase programme (PEPP) is envisioned as temporary, but this depends on how the situation evolves, according to outgoing ECB Governing Council member Vitas Vasiliauskas.

In an interview with Econostream on Friday at the Bank of Lithuania, which he heads, Vasiliauskas called the decision on March 11 to increase PEPP purchase flows ‘the right reaction to the possibility of a worsening of financing conditions.’

‘For the moment we see this as a temporary measure, but everything will depend on the situation’, he said. The size of the PEPP envelope ‘can also be seen as a flexible parameter’, he said, but recalibrating it ‘is not on our agenda at the moment’ and the current €1.85 trillion volume ‘should be enough’.

At the end of 2021 or in early 2022 the Council will need to decide whether to continue conducting net purchases under the PEPP, he said. These are currently slated to continue at least through March 2022 and in any case until the Council considers the crisis phase over.

‘[I]t would be wrong for us to impose on ourselves any premature limitation about a potential continuation and paint ourselves into a corner’, he said. ‘PEPP offers a lot of very important flexibility.’

Vasiliauskas denied that anyone on the Governing Council was likely to have been disappointed by the March 11 decision, as that would imply disagreement, whereas ‘the final decision really was reached by unanimous agreement’, he said.

Asked why the ECB was so keen on keeping alive the idea of another cut in the deposit facility rate, Vasiliauskas, whose second and final term of office ends in early April, said the ECB was ‘just trying to say that we can use any tool we have.’

As the ECB considers the deposit facility rate to have not yet reached the so-called reversal rate, a cut remains a viable tool, even if ‘there is no need at the moment’ and the issue was not discussed on March 11, he said. However, ‘we can still face many unexpected developments’, he added.

Vasiliauskas dismissed the possibility of overheating in the euro area occurring anytime soon, despite the shift of the balance of risks ‘in a more positive direction’. The ECB ‘can ignore the fact that during this year - so in the short term - inflation will approach 2%’, he said, since ‘[t]he one-off factors behind this do not change the medium-term perspective’ in which inflation remains subdued.

If inflation continued elevated into 2022, the ECB would still stay firmly focused on the medium term, he confirmed, dismissing concerns about a sudden change in the medium-term inflation outlook.

‘I don’t think that the assumption that medium-term inflation could change so rapidly is correct’, he said. ‘But even if that were the case, there would be no problem reacting to it.’

The possibility of tolerating medium-term inflation above 2% in view of the long period to date of too-low inflation is ‘an important part of our strategic review’, he said.

He continued: ‘But I personally do not see any problem in overshooting and then living for some time in a situation of inflation that is higher than 2%. Of course that’s only because it’s been so low for so long. This is how I understand symmetry.’

Vasiliauskas’ view is in line with that of ECB Chief Economist Philip Lane, who last week said there was a ‘very strong logic’ to ‘a strategic commitment that following a period of undershooting you signal that the correction phase is not just going to the target but going moderately above the target for a period.’

Another consequence of the strategic review could be ‘that some measures seen as extraordinary ten or five years ago or maybe even now will be regarded as ordinary tools in the future’, he said. ‘The asset purchases have already become more and more an ordinary measure of daily monetary policy.’

It was correct of the ECB not to include the U.S. fiscal package in producing new macroeconomic forecasts, as the final passage of the stimulus had simply not made the cutoff date for inclusion, he said.

‘[B]ut of course in our discussions we touched on the possible impact of the U.S. stimulus, and we all know that we can expect an impact on the euro area that could amount to 0.3 point on GDP and .15 point on inflation’, he said. ‘So it pushes the balance of our risks in a positive direction.’

Asked about the possibility of an adjustment to the parameters of the ECB’s two-tier system exempting credit institutions from remunerating part of their excess reserve holdings at the negative rate currently applicable on the deposit facility, Vasiliauskas said this had not been discussed recently.

‘I don’t exclude that we will have such a discussion at some point, but I don’t see a need for the moment’, he said. ‘We are relying chiefly on PEPP and on the TLTROs, and those are the tools we are mainly occupied with right now.’

Fluctuations in the exchange rate of the euro are ‘quite normal’ and if seen in historical context, then ‘the current level against the U.S. dollar is okay’, he said. In the past, ‘we had a much stronger euro at times than we have now … so I am not worried’, he said.