ECB’s Lane: PEPP Buys over Several Weeks to Show Consistent, Substantial Increase

23 March 2021

By David Barwick – FRANKFURT (Econostream) – Asset purchases over the course of several weeks under the European Central Bank’s pandemic emergency purchase programme (PEPP) will make clear that the ECB is following through on its promise to significantly increase the pace of buying, ECB Executive Board member Philip Lane said on Tuesday.

In an interview with CNBC posted to the ECB’s website, Lane, who is also chief economist, indicated that the €21 billion in net PEPP purchases last week announced yesterday by the ECB ‘reflect our commitment to have a substantial increase in the pace of purchasing.’

Although ‘weekly data are always confounded a bit by redemptions and the week-to-week special factors’, he said, ‘if you average over several weeks you will see the substantial increase in a consistent way.’

The March 11 decision to increase asset purchases reflected the ECB’s ability to ‘decouple, if you like, the trend in the international bond market and the trend in the euro area market’, he said. While one might not speak of ‘100% decoupling’, he said, neither have euro area yields increased as much as those in the U.S.

‘And in the end, it’s for us to determine, as we did in the March decision, based on the joint assessment of what's going on in terms of financing conditions, and also what we see in terms of the inflation outlook – that will determine how much we react in terms of the scale of asset purchasing’, he said.

Lane sought to establish common ground between his camp and more hawkish members of the Governing Council who have emphasised the temporary nature of the acceleration in asset purchases, calling it ‘our shared view’ that ‘essentially it depends on the pandemic’.

The PEPP’s flexibility will allow the proper response to whatever scenario occurs, he said, whether it be one of ‘some disappointment, or whether there’s some acceleration of good news’. Calls to keep the increased rate of purchases temporary simply reflect ‘a conjecture about one pathway’, he said.

‘But the more overriding theme, I think, is with uncertainty about the pandemic, the PEPP will adjust in a flexible way to make sure that financing conditions remain favourable and, in particular, that they've remained supportive of countering the pandemic shock to inflation’, he said.

Asked why nominal rates in bond markets were a reason for concern, Lane said that these needed to be compared to the ECB’s medium-term inflation projection of 1.4%, given which the ECB wants rates to remain ‘fairly low’.

‘In fact if we do see inflation pick up − and let me emphasise what really matters with respect to inflation is economy-wide, not just the viewpoint of financial traders, but we would need to see it in firms and households as well − so ideally any pick-up in expected inflation, if it adds to inflation momentum we welcome it’, he said.

Lane declined to be drawn out about the possibility the ECB would allow a period of inflation overshooting, calling this ‘an interesting debate’ and observing that the ECB was ‘still in the middle’ of its strategy review.

The bigger point is that with central banks worldwide undershooting their inflation target, he said, ‘the universal emphasis and our emphasis has to be to make sure that monetary policy support remains in place until inflation is robustly where we want it to be.’

Only last week, Lane had said that he saw ‘a very strong logic’ to signalling that the correction after a period of under-target inflation will involve ‘going moderately above the target for a period.’ Inflation of 2% has not ‘necessarily been seen as a ceiling’, given ‘plenty of overshooting periods in the past’, he said at the time.

The renewed spread of Covid-19 is consistent so far with the ECB’s updated staff macroeconomic forecasts, he said. Without more progress in vaccinating citizens and more clarity about the threat posed by the variants, the pandemic is ‘clearly a risk factor’, he said.

‘As we now go into the second quarter, it’s going to be a long quarter’, he said, characterising it as ‘a contest between progress and vaccinations and other medical progress versus the near-term challenge of trying to get this virus under control.’

The latter ‘remains the dominant issue in the near term’, he said. On the other hand, the U.S. fiscal stimulus and better-than-expected economic outcomes recently in Europe ‘renewed confidence in the medium-term outlook’, he said.

The ECB takes a broad approach in assessing favourable financing conditions to reflect the importance of bank- and market-based financing, he said. The risk-free curve and sovereign yields have a ‘special status’ because of their importance for overall financing conditions, he said.

‘And also, it’s obvious when we think about our asset purchasing, that’s where we operate on, we operate on the risk-free curve and the sovereign yields’, he added. ‘And that’s why we pay particular attention when we see a significant movement in these yields, as we did over recent weeks.’