ECB’s Panetta: Yields Undesirably Risen, Financing Conditions Tightening, Euro Appreciating

26 May 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Fabio Panetta on Wednesday said that yields had recently increased undesirably and that financing conditions were tightening.

In an interview with Japanese financial newspaper Nikkei, a copy of which was made available by the ECB, Panetta also said that the euro had appreciated and that the June 10 meeting of the Governing Council would be an occasion to discuss such developments.

Asked whether the current pace of asset purchases under the ECB’s pandemic emergency purchase programme (PEPP) ought to maintained after June, Panetta called favourable financing conditions ‘crucial’, demand ‘still weak’ and underlying inflation ‘very low’.

Policy support thus ‘remains essential and a premature tightening in financing conditions must be avoided’, he said. ‘The risk of providing too little policy stimulus is still high.’

A slower pace of asset purchases could only be justified by a ‘sustained increase in inflationary pressures, reflected in an upward trend in underlying inflation and bringing inflation and inflation expectations in line with our aim’, he said.

However, neither the March staff macroeconomic projections nor developments since then would be consistent with this occurring, he affirmed.

‘In fact, we are now seeing a further undesirable increase in yields after the rise we observed earlier in the year’, he said. ‘Financing conditions are tightening. In this environment, it is not surprising that we have also seen a persistent, non-negligible appreciation of the exchange rate, which – if sustained – would weaken inflationary pressures.’

The June Governing Council meeting would be a forum to ‘discuss the implications of these trends’ in the context of updated projections, he said.

Panetta declined to speculate on what would happen to PEPP in ‘almost a year from now’, when its termination is presently tentatively envisioned. In any case, the ECB never spoke of ending the programme next March unconditionally, he said, but rather of doing so only when the crisis had passed. ‘Our objective is to stimulate the economy enough to end the coronavirus phase’, he added.

Where things stand with respect to the recovery, inflation and inflation expectations should be revisited ‘six or nine months from now’, while keeping in mind that post-pandemic inflation will still be distant from the ECB’s objective, he said.

Panetta reacted sceptically to the idea of letting more standard support measures take over for emergency measures, reiterating his opposition to any reduction in the pace of purchases or discussing an unwinding of the PEPP.

‘Our decisions should not be swayed by narratives from abroad’, he said. ‘Instead, they should be guided by compelling data about the euro area.’

Pressed, however, Panetta offered a possible point at which the data could be compelling. ‘In my view, it is reasonable to look at a horizon of around two years for inflation to converge towards our aim’, he said.

While reiterating the ECB’s expectation of a second-half economic rebound, he stressed the distance from pre-pandemic activity levels and the associated loss of jobs, and said the economy was still ‘far from the point where we can see self-sustained growth.’

Uncertainty remained elevated and removing policy support too soon ‘would risk suffocating the recovery before it becomes self-sustained’, he said.