ECB’s Schnabel: Can Change Any Parameter of PEPP; Could Also Modify Tiering System

28 April 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank can change any aspect of its pandemic emergency purchase programme (PEPP) at any moment if warranted, Executive Board member Isabel Schnabel said on Wednesday.

In a Twitter Q&A, Schnabel said that the extent to which the ECB would tolerate higher yields ‘depends on how real interest rates compare to real equilibrium rates. In practice this has to be judged in light of current and expected economic and inflation developments. The envelope may not be used in full or expanded as needed.’

The PEPP’s duration ‘is linked to the pandemic crisis phase’, she said. ‘We are free to adjust any parameters of the programme at any point in time if required to fulfil our price stability mandate.’

Purchase volumes from month to month can vary, she said, ‘as we continue to buy flexibly according to market conditions.’ The weekly change in PEPP holdings at the beginning of April was influenced by ‘redemptions, the reduced number of trading & settlement days due to the Easter holidays and the quarter-end amortisation adjustment’, she wrote.

Schnabel defended PEPP purchase amounts as having been ‘significantly stepped up’ on a monthly basis. ‘[T]his is not always visible in the weekly numbers’, she said.

Asked whether the PEPP’s expiry next year would be mitigated by changes to the PEPP or the targeted longer-term refinancing operations (TLTROs), she replied, ‘We will have to carefully manage the transition from the pandemic to the post-pandemic period. This may include a recalibration of our regular tools and will take into account the outcome of our monetary policy strategy review.’

Schnabel called the ECB’s tiering system ‘successful in alleviating the side effects from negative interest rates for banks. If we were to observe risks to the bank-based monetary transmission from rising excess liquidity, the tiering multiplier could be adjusted.’

Bank lending rates close to historical lows and the ECB’s lending survey showed credit standards tightening further, though ‘more moderately than in previous survey rounds’, she said. ‘We are carefully monitoring bank lending conditions.’

The TLTROs have been a ‘crucial’ measure that helped avoid a credit crunch earlier in the pandemic, she said.

The euro area economy would rebound in the second half of the year, she said.

A lower inflation objective would ‘carry the risk of hitting the effective lower bound more frequently’, she objected. The current objective is symmetric, as noted in the introductory statements, she said.

The ECB sees inflation ‘subdued over the projection horizon’ and ‘still well below our inflation aim’, she reiterated. She conceded however that monetary authorities ‘are currently seeing price increases for some goods, like lumber, which may eventually be transmitted to consumer prices, depending on their weight in the consumption basket.’

‘Monetary policy has to remain accommodative, including very low interest rates, to get the economy back on track, in line with our price stability mandate’, she said.

As part of the ECB’s strategy review, the ECB’s definition of price stability, how to take housing costs into account when measuring inflation, and ‘ the question of overshooting’ are all under discussion, she said. The inflation perceived by consumers does not necessarily correspond to measured inflation, and an individual consumer may experience inflation different from average inflation, she reminded.

Even with interest rates low, saving represents a necessary transfer to the future of current income, she said. ‘What matters are real not nominal interest rates’, she said. ‘Ideally savings are diversified across different asset classes according to individual risk preferences.’

Low bank profitability in the euro area ‘has been a reason for concern for quite some time’, she said, which is why profitability is a key priority for supervisors this year.

Monetary policy is ‘no exception’ to the rule that policy measures can always entail side effects, she said. ‘We assess the proportionality of our measures by weighing their benefits and costs’, including financial instability and inequality, she said.

Current measures are supporting favourable financing conditions, and without them ‘the outlook for growth and inflation would be worse’, she said.

Schnabel rejected the idea of cancelling debts held by the ECB. This ‘would constitute monetary financing and violate the Treaties’, she said. ‘It would also call into question the ECB’s commitment to its price stability mandate and undermine the rule of law and the independence of the ECB.’