ECB’s Stournaras: No Evidence Things to Turn Benign Enough in 3Q to Phase Out PEPP

9 April 2021

By David Barwick – FRANKFURT (Econostream) – There is no reason to expect next quarter to bring about such an improved economic outlook that the European Central Bank could start to phase out its pandemic emergency purchase programme (PEPP), Governing Council member Yannis Stournaras said Friday.

In an interview with Bloomberg, Stournaras, who heads the Bank of Greece, said that if needed, the PEPP could in fact be extended beyond its currently planned termination date of next March.

The third quarter would be ‘too soon’ to start phasing out PEPP purchases, he said, rejecting the view expressed earlier by his Dutch Council colleague Klaas Knot. ‘We don’t have any evidence that things will turn so benign in the third quarter.’

‘What we have agreed in the Governing Council is that we’ll do whatever it takes with our pandemic programme to make sure that there will be favourable financial conditions’, he continued. ‘And we’re still falling below our inflation targets.’

The ‘blip’ in inflation seen occurring this year is ‘for one-off reasons’, he said. ‘But the inflation outlook remains still very weak compared to our target. So I don’t see any reason why we should withdraw the monetary stimulus we are providing now.’

The proper time to commence such a withdrawal would be ‘[w]hen we have concrete evidence that inflation is coming up on a sustainable and permanent basis’, he said. ‘The pandemic programme runs in principle up to March, but if needed, it can be extended.’

Stournaras said he ‘absolutely’ agreed with Executive Board member Isabel Schnabel’s view that an indefinite delay in the disbursement of Next Generation EU recovery fund money ‘would be an economic disaster’.

‘It is a very vital instrument for the recovery of the Eurozone, and so if there are delays, I’m afraid our forecast will not be correct’, he said. ‘So we must do everything possible so there will be no delays of the recovery fund.’

The money from the fund is needed ‘a lot’ by ‘[s]pecific countries in the European south’, he said, and without it, ‘the recovery will not be here this year.’

Stournaras described recent news as ‘mixed’, noting that the U.S. was doing better at vaccinating people and had a larger fiscal stimulus, though the latter would also impact Europe.

‘Of course the forecasts now are slightly better than before’, he conceded. ‘There’s still uncertainty, but not as much as before, because science has won. We have vaccines now. … So all in all, I would say we are better than before, but there is still uncertainty. There are certain downside risks.’

The increase in bond yields earlier in the year reflected ‘investors run[ning] ahead of the economy’, he said, which is why the ECB decided to accelerate PEPP purchases. ‘So it is good that there is more optimism, but we should not rush ahead. We want to make sure that financial conditions remain favourable as far as the pandemic still prevails.’

Stournaras said he had no worries about the ultimate transition from the PEPP to the ECB’s regular asset purchases as primary monetary policy instrument, but urged erring ‘on the safe side.’

‘Don’t repeat past mistakes’, he said. ‘It’s absolutely necessary to keep monetary accommodation in place.’