TRANSCRIPT: Interview with ECB Governing Council Member Vitas Vasiliauskas

22 March 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on Friday with outgoing European Central Bank Governing Council member Vitas Vasiliauskas:

Q: Why is the ECB so keen on publicly keeping alive the idea of another cut in the deposit facility rate, especially given no reason at the moment to do anything?

A: All the tools are on the table, and a deposit facility rate cut remains one of the tools. We are just trying to say that we can use any tool we have. But there was no need at our March 11 monetary policy meeting to use such a tool, so it was not discussed. Of course if there were a need, we could use it, especially keeping in mind the fact that the ECB has conducted a study showing that we are not yet at the reversal rate at which the costs of another facility rate cut would exceed the benefits. So we can still use it, but there is no need at the moment.

Q: Might it not be the case that the window of opportunity to contemplate a rate cut has closed, making any discussion of a facility rate cut wholly unnecessary?

A: I wouldn’t say that. The environment is still characterized by high uncertainty, and we can still face many unexpected developments. We try to make clear that we have many ways to react. Of course PEPP is a particularly flexible tool and for the moment is the main tool in our reaction function.

Q: The PEPP envelope was not increased on March 11, yet the pace of purchases was. Does this implicitly reflect an assumption by the Governing Council that the outlook later will allow the pace of purchases to be reduced?

A: The main decision taken last time was to increase purchase flows, and that was the right reaction to the possibility of a worsening of financing conditions. We want to keep financing conditions at the same favourable level. It was appropriate to take action about 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. If there were to be a need, we could also change the size of the PEPP envelope. For the moment, I do not see any need to do that. My view was that we clearly needed to react by increasing monthly purchases, but there is no need to discuss the end of the programme. As we have said, PEPP purchases in general will continue until at least March 2022, and every six weeks we can look at how things stand.

Q: We may still be far from overheating in the euro area, but do you think this could easily change?

A: Let’s start from the balance of risks, which is very closely related to the question. I think that the balance of risks has shifted in a more positive direction. The economic situation in Europe depends above all on progress in vaccination, which is why ECB staff macroeconomic scenarios are very much based on this and the associated abolishment of containment restrictions. The forecast is now better than in December, but we think that we can reach pre-pandemic GDP levels only in mid-2022. It’s the same with inflation – at our medium-term horizon, inflation is still only at 1.4%. We can expect some movements in inflation through the rest of this year, but those fluctuations will mostly be driven by technical effects related to oil, the carbon dioxide emissions tax in Germany, the normalisation of the German VAT and so on. So I’m not worried about overheating in Europe.

Q: And in the U.S.?

A: In the U.S. the situation is different, especially given the new fiscal package. It will add substantial additional stimulus to the U.S. economy and put them back at the pre-pandemic level of output already this year. But still, I trust the authorities over there to avoid any serious overheating.

Q: The ECB intends to ‘see through’ higher inflation this year, attributing it to temporary effects we just mentioned. Does that mean a debate about the nature and possible effects of higher inflation is completely off the table for the rest of the year?

A: We always focus on the medium term. And according to this perspective, we can only expect HICP of 1.4%, which means we can ignore the fact that during this year - so in the short term - inflation will approach 2%. The one-off factors behind this do not change the medium-term perspective.

Q: And if elevated inflation continued into next year, the ECB would still stay firmly focused on the medium term?

A: Yes.

Q: And how worrisome are prospects for medium-term inflation to be seen recovering too soon, i.e. before anyone is ready for the shift in the monetary policy stance that such an inflation recovery would imply?

A: I don’t think that the assumption that medium-term inflation could change so rapidly is correct. But even if that were the case, there would be no problem reacting to it. Such a possibility we can discuss only very theoretically. But from a theoretical point of view, the ECB is always ready to react. Our reaction function in the face of higher inflation is part of our DNA, so it would be no problem.

Q: What about simply tolerating it, given we had such low inflation for such a long time?

A: This question of tolerance or overshooting after undershooting is an important part of our strategic review. I think we will say more about this when we conclude the review. 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. But it doesn’t mean that if we are under 2% for ten years, then we are over 2% for ten years. We still have to take into account our medium-term horizon.

Q: How likely do you think the ECB is to use the entire current envelope of the PEPP?

A: It’s too early to say. From today’s perspective, I think the current PEPP envelope should be enough. But everything will depend on the economic situation and especially on financing conditions. We still have one year until March 2022 and we will take a good look at conditions every six weeks between now and then. For now, we should concentrate on the proper flows. The question of the envelope size is not on our agenda at the moment. PEPP is flexible, and the envelope can also be seen as a flexible parameter.

Q: March 2022 will arrive quickly; from today’s perspective, and despite high uncertainty, until when do you estimate net asset purchases will be conducted?

A: It depends on the economic situation, which depends on the pandemic, so it’s difficult to say. Our forecast for GDP is that next year we can expect to return to pre-pandemic levels, so at the end of this year or the beginning of next year we will have to discuss this. But it would be wrong for us to impose on ourselves any premature limitation about a potential continuation and paint ourselves into a corner. PEPP offers a lot of very important flexibility.

Q: How do you assess the current level of the euro, and the speed with which we reached it, from the point of view of the ECB’s efforts to safeguard price stability and the broader economic implications?

A: Of course I first have to make the disclaimer that we don’t target the exchange rate. I look at the exchange rate from a historical perspective, so fluctuations are quite normal and the current level against the U.S. dollar is okay. During the history of the euro we had a much stronger euro at times than we have now. If you look back, you see many similar situations, so I am not worried.

Q: In late 2019 the ECB introduced the two-tier system exempting credit institutions from remunerating, at the negative rate currently applicable on the deposit facility, part of their excess reserve holdings. The ECB said at the time that both the multiplier and the allowance’s remuneration rate could change over time. Back then, about half of all bank reserves at the ECB qualified. As a result of the TLTROs and all the asset purchases, bank reserves at the ECB have doubled. The increase in the exemption allowance hasn’t kept pace, so the share of bank reserves at the ECB has dropped from 50% to about half, implying a corresponding increase in the costs of the negative deposit rate. Is there any discussion of a review of the exemption parameters?

A: We haven’t discussed it 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. We are relying chiefly on PEPP and on the TLTROs, and those are the tools we are mainly occupied with right now.

Q: How did you feel about the take-up of the latest TLTRO?

A: I didn’t see it as anything special. We have several more operations this year, so let’s see.

Q: How worrisome is the extreme divergence of inflation across the Eurozone, with Germany recording 1.6% and Greece -1.9% in February?

A: It’s normal in view of the way the different economies of the Eurozone member states are structured. In the southern countries, tourism is a major sector of the economy, so a major contraction in that sector is going to have an effect on prices and from there on inflation. I wouldn’t necessarily say that it’s a problem.

Q: One of the ECB’s most pressing problems may soon be to manage a situation in which inflation in the area as a whole appears to be on a sustainable path to recovery (even if this is mainly because of the situation in one particular economy, the area’s largest) before the economy of many or most countries has regained solid ground, and of course also in the context of high debt across the region, including in particular countries whose debt situation was worrisome even before the pandemic. To what extent will the outcome of the strategic review be influenced by this? Or, to put it another way, do you see a high likelihood that the outcome will be geared to this situation, so that – for example – some aspect of the outcome will, by design, permit the ECB to stay in crisis mode longer than its current framework would allow?

A: Let’s start by considering the institutional architecture and the fact that the ECB operates under a legal framework established by the Treaty. I don’t think the strategic review can change that. But within that limitation, of course we are flexible and we can create additional tools. The toolbox is one of the subjects of discussion in the strategic review. If we compare the Eurosystem of ten years ago with today’s Eurosystem, we can see a huge evolution. I have no doubt that some measures seen as extraordinary ten or five years ago or maybe even now will be regarded as ordinary tools in the future. The asset purchases have already become more and more an ordinary measure of daily monetary policy. We have to wait until autumn for the outcome of the strategic review, but if you ask me how I see it at the moment, I can say that this could be one of the outcomes of the exercise.

Q: As the passage of the U.S. fiscal stimulus package seemed assured as of days before the Council meeting, don’t you think they should have taken this into account more for the staff projections? Or was not taking the stimulus into account purposeful, i.e. to keep macroeconomic forecasts less optimistic than the reality?

A: No. The forecast exercise follows a certain procedure and takes into account data and information as of some cutoff date. So it was right not to include it, but 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. So it pushes the balance of our risks in a positive direction.

Q: Madame Lagarde referred to ‘total consensus’ in reaching the latest decision. Why are we told that no one objected to the decision to increase the pace of purchases? It is very clear that there were significantly divergent views going into the meeting.

A: Preparation for a meeting is one thing and involves the formation of a position and trying to understand what’s going on. The final decision is another thing. And the final decision really was reached by unanimous agreement on the monthly volumes. It’s the normal process of decision-making. You go through different stages on the way to the decision, so at the beginning of the process you see all these different views, but then you discuss it, you exchange views, you listen to arguments, you make your own arguments, and then you decide. I wouldn’t even say that anyone on the Council was disappointed by the outcome of that meeting, because that would imply disagreement with it. It’s a collective body and you try to reach a common decision.