ECB’s de Cos: Financing Conditions and Inflation Outlook Could Lead to PEPP Extension

19 May 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank will continue to set the pace of asset purchases under the pandemic emergency purchase programme (PEPP) – potentially implying an extension of the programme - so as to keep financing conditions favourable, ECB Governing Council member Pablo Hernández de Cos said Wednesday.

Speaking before Spain’s Congress of Deputies to present the 2020 annual report of Banco de España, which he heads, de Cos said that monetary policy ‘must avoid a premature tightening of financing conditions.’

A joint consideration ‘at each point in time’ of the state of financing conditions and the outlook for inflation is ‘the policy framework … that we will follow in the coming months in determining the pace of purchases in the context of the PEPP, including its possible extension’, he said.

De Cos made clear again that the ECB’s ongoing strategy review was an opportunity to meet the longer-term challenges of a low-inflation environment, and said the US Federal Reserve’s own review’s outcome ‘shows the merits of allowing the inflation target to be exceeded moderately and temporarily in an environment where inflation is persistently below target and nominal interest rates are close to their lower bound.’

 The inflation target of the ECB is not well suited to a strategy that embraces overshooting, he said. ‘A rate of 2%, understood symmetrically, would be a good option’, he said.

Compared to China, the UK and the US, ‘Spain and the other euro area countries are less advanced in the vaccination process’, he said. ‘But their acceleration in the last few weeks suggests that they will take the path of recovery in the second quarter, a path that, as restrictions on activity are removed, could accelerate in the second half of the year.’

De Cos confirmed Banco de España’s March forecasts calling for GDP growth in Spain of 6% this year and 5.3% next, with a subsequent moderation to 1.7% in 2023. Even so, he noted, the Spanish economy would not return to pre-pandemic levels until 2023, in contrast to the euro area overall in 2022.

Moreover, there are various sources of uncertainty, he said, including the evolution of the pandemic; the progress of vaccination campaigns; the recovery of the important tourism sector; household spending; the degree of scarring and the associated questions of corporate insolvencies and nonperforming loans; and the timing of recovery fund money.