ECB Meeting Account Shows PEPP Purchase Acceleration a Compromise Solution

8 April 2021

By David Barwick – FRANKFURT (Econostream) – The account of the European Central Bank’s policy meeting of 10-11 March, released by the ECB on Thursday, indicated that the Governing Council arrived at the decision to step up pandemic emergency purchase programme (PEPP) purchases via a compromise in which the PEPP envelope was understood to be adequate for now.

According to the account, Council members broadly supported ECB Chief Economist Philip Lane’s proposal that the pace of PEPP purchases over the next quarter be ‘significantly higher’ than previously, on the grounds that financing conditions had tightened despite ‘the lack of a material improvement in the growth and inflation outlook.’

While a significant increase in purchases would ‘send a strong signal’, the account said, another view was that ‘a more moderate increase’ corresponded more closely to the improved balance of risks as well as to previous decisions in favour of a similar pace under worse conditions.

Moreover, the increase in risk-free rates and GDP-weighted sovereign bond yields was seen in the context of risen inflation expectations and generally better global economic prospects.

‘In this context, it was remarked that the Governing Council needed to avoid giving the impression of being overly focused on sovereign yields or reacting mechanically to a set of indicators of financing conditions’, the account reported. ‘Moreover, the view was put forward that the tightening might not be sizeable and persistent enough to affect broader financing conditions materially.’

According to the account, ‘all members joined a broad consensus around the proposal put forward by Mr Lane, on the understanding that the total PEPP envelope was not being called into question in the current conditions and that the pace of purchases could be reduced in the future.’

By significantly accelerating PEPP purchases, the ECB could be seen to use the PEPP’s built-in flexibility without a more general recalibration of the programme, the account said, though it noted that recalibration remained an option if necessary.

‘Equally, if favourable financing conditions could be maintained with asset purchase flows that did not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full’, the account reported. ‘It was underlined that the flexibility embodied in the PEPP was symmetric, implying that the purchase pace could be increased and decreased according to market conditions.’

The Council agreed to make the pace of PEPP purchases dependent on the outcome of a joint quarterly assessment of financing condition favourability and the inflation outlook, while retaining the flexibility to make adjustments as needed at any time, the account said.

Communication should stress the ECB’s willingness to adjust all instruments with an eye towards achieving its price stability objective, its determination to keep policy loose, the absence of any overheating risks in the region and the need for fiscal policy support to remain in place, the meeting account said.