ECB’s Villeroy: March 2022 End of PEPP Purchases Doesn’t Imply Abrupt Tightening
13 April 2021
By David Barwick – FRANKFURT (Econostream) – Even if the European Central Bank decided to end net purchases under the pandemic emergency purchase programme (PEPP) next March as planned, this would not mean that monetary policy would abruptly tighten, Governing Council member François Villeroy de Galhau said Tuesday.
In a speech for the Peterson Institute for International Economics, Villeroy, who heads the Bank of France, said the time for an exit from the ECB’s exceptional measures had not yet come and that there remained ‘plenty of time to judge and decide’ whether the exit should be deferred beyond the March 2022 date of the current baseline scenario.
‘But the possible end of net asset purchases under the PEPP at that time would not imply a sudden tightening of our monetary policy’, he said. ‘Reinvestments under the PEPP would remain substantial and purchases would continue under the APP, possibly with slight adjustments.’
‘We would therefore still have the opportunity to play the full "quartet" of our accommodative monetary policy instruments, adding negative rates, liquidity provision and forward guidance’, he added.
Villeroy rejected the idea that the ECB should clearly and quantitatively define favourable financing conditions and possibly practice yield curve control with respect to sovereign bonds.
‘I disagree: as we are concerned with financial conditions for all borrowers - not just sovereign borrowers - and different forms of financing - not just market financing - we stick to a multidimensional and holistic assessment’, he explained.
Moreover, given that the ECB looks at both real and nominal yields, financing condition favourability must also consider the inflation outlook, he said.
‘Our decisions will therefore be taken on an informed basis rather than by applying pre-determined rules’, he said. ‘Not acting automatically does not prevent us from reacting effectively, quite the contrary.’
The ECB’s decision to step up bond purchases has effectively ‘limited unwarranted transatlantic spillovers’, he said.
The exit decision, the PEPP’s flexibility and a possible strengthening of the ECB’s forward guidance form what Villeroy called a ‘triangle of equilibrium’ for monetary policy. The latter part he proposed reinforcing in line with the symmetry of the ECB’s inflation target.
‘Rather than flexible inflation targeting on average, which leaves many questions unanswered, my preferred option would be to use enhanced (and non-linear) forward guidance, explicitly stating that we tolerate above-target inflation, with reference to past inflation deficits’, he said.
‘It is the combination of these three levers that should be used to lay the foundations for the "equilibrium triangle" of our monetary policy in this next phase of the Covid crisis’, he said.
While the discussion about inflation’s possible return ‘may be legitimate in the US’, here it is not, he said. The US recovery would lead to a closed and subsequently positive output gap this year already, he said.
‘The surge in inflation could, however, be transitory and then hopefully stabilise in a new regime of “controlled reflation”’, he said. Euro are inflation has risen owing to temporary factors, but ‘significant’ spare productive capacity will limit the upside ‘despite a significant recovery from the second half of this year’, he said.
Inflation here is thus below the ECB’s target, he said. That target should be formulated without ‘the overly sophisticated qualifiers still associated with the 2% figure’, he suggested. Moreover, it should not be seen as a ceiling; ‘we might be prepared to accept inflation above 2% for a while’, he said.
‘Finally, "medium-term" means that we assess inflation performance over a sufficiently long period of time, looking ahead but not ignoring the past’, he added.