ECB’s de Guindos: PEPP Should End When Emergency Over; Emergency Mainly a ‘Medical Question’

30 July 2021

By David Barwick – FRANKFURT (Econostream) – The end of the European Central Bank’s pandemic emergency purchase programme (PEPP) could come down to the question above all of when the pandemic is resolved, Vice President Luis de Guindos said Thursday.

In an interview with Handelsblatt, de Guindos said that the Governing Council still had ‘time to decide about the future of PEPP. In September we will set the pace of the purchases for the fourth quarter, in December for the first quarter of 2022.’ The PEPP’s end should be ‘when the emergency is over and its dampening effect on inflation disappears’, he said.

When the emergency would be over ‘is a medical question first and foremost’, he explained. ‘It depends on whether the vaccination campaigns are successful in combating the delta variant and whether new, more resistant variants appear.’

As for the role of the asset purchase programme (APP) when the PEPP ends, ‘the main priority is to avoid a cliff effect’, he said. ‘We will need substantial monetary support for the economy for some time to come. Even if recovery is successful, there is still a lot of uncertainty.’

De Guindos appeared to play down the importance of the PEPP’s flexibility, asserting that while the ECB had ‘deviated from the capital key somewhat at the beginning of the pandemic, which was certainly helpful’, thereafter ‘bond purchases have broadly been in line with the weights of the capital key.’

At the last Governing Council meeting, members decided to hike rates when inflation is seen at 2% from well ahead of the end of the projection horizon onward, he said. At the same time, underlying inflation would need to show ‘realised progress’, he said. ‘This is not the case right now. While we are currently seeing inflation rates of close to 2% in the euro area, we are expecting them to fall next year and remain in those levels after.’

Asked what the basis for that assessment was, de Guindos referred to ‘a number of different indicators’, key among which were staff projections and, ‘especially,’ the Council’s assessment.

Euro area HICP would peak ‘around 3%’ towards year’s end, he said. The situation here was ‘very different to that in the United States.’ The possible emergence of second-round effects needed close monitoring, ‘because temporary inflation must not be allowed to become structural inflation’, he said. ‘So far, however, there have been no indications that this is the case, but we should remain vigilant.’

Monetary policy normalisation would follow economic normalisation, he said. ‘If the recovery takes hold, if we go back to pre-pandemic output level, growth is back to potential and inflation reaches our target of 2%, then we should start to normalise our monetary policy’, he said. ‘We need to fulfil our price stability mandate, under all circumstances.’

Although some would see economic normalisation as a return to pre-pandemic levels, ‘I would argue that back to normal means back to the pre-pandemic growth path’, he said.

De Guindos assuaged concerns about bubbles resulting from monetary accommodation. While some segments of the housing market may be susceptible, this was already so before the pandemic, he said. ‘And, importantly: the greatest threat to banks, namely a surge in insolvencies and defaults, has not materialised so far despite the fears we had at the start of the pandemic’, he said.

The greater weight to be accorded financial stability as a result of the strategy review ‘I don’t think has received enough attention’, he said when pressed about the possibility stability risks would yet emerge from loose ECB policy. In any case, he added, ‘our stimulating monetary policy is necessary now − and for the time being in order to maintain favourable financing conditions.’