ECB’s Knot: Our Baseline Scenario Implies Phasing Out PEPP Starting Third Quarter

7 April 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s baseline forecast implies that asset purchases made under the pandemic emergency purchase programme (PEPP) could be phased out starting next quarter, Governing Council member Klaas Knot said Wednesday.

In an interview with Reuters, Knot, who heads the Dutch National Bank, said, 'If the economy develops according to our baseline, we will see better inflation and growth from the second half onwards. In that case, it would be equally clear to me that from the third quarter onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022.'

According to the news agency, Knot said he saw 'very good reason to expect a robust recovery in the second half of the year', citing pent-up demand funded by enforced saving, further fiscal stimulus and a general improvement of conditions.

'The deterioration is focused on the short term but hasn’t changed the outlook beyond the short term all that much', he said.

Knot reportedly dismissed the idea that unwinding measures taken during the pandemic would be a preliminary to a more general withdrawal of easing, saying that the 'inflation outlook does not provide any case for tightening our standing instruments, like our forward guidance on rates or the APP. Exiting our emergency measures does not equate to exiting our accommodative monetary stance.'

With respect to market yield movements , he was unconcerned. 'To the extent that higher nominal yields are driven by better inflation and growth prospects, to me that’s entirely benign', he said. 'If real rates are roughly constant, it means that higher nominal rates are entirely due to higher inflation expectations and that is something I’m comfortable with.'