ECB Insight: Must PEPP Ever Really End? De Guindos Might Make One Wonder…
30 July 2021
By David Barwick – FRANKFURT (Econostream) – Whether the European Central Bank’s pandemic emergency purchase programme (PEPP) ever really needs to end could theoretically be an open question, based on ECB Vice President Luis de Guindos’ latest comments on the subject.
In an interview with Handelsblatt published Thursday, de Guindos said that ‘[t]he PEPP should end when the emergency is over and its dampening effect on inflation disappears.’
Unless one assumes that the ECB’s number two was speaking too casually in an interview with the leading business daily in the euro area’s largest economy, there are thus two criteria that must both be met for the PEPP to be allowed to expire.
De Guindos did not enlarge on what would constitute the disappearance of the PEPP’s ‘dampening effect on inflation’, but presumably meant a return to the pre-pandemic path of inflation.
The ECB does not seem to expect that condition to be fulfilled anytime soon, and de Guindos sounded pessimistic about the prospects. ‘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’, he said.
Then there was the other condition, namely an end of the emergency. That ‘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.’
Most experts seem to think that the coronavirus is unlikely to disappear, but will instead continue to crop up here and there for years to come, potentially producing more or less pernicious variants. With herd immunity in most advanced economies still off in the distance just as vaccination rates decelerate and governments grapple with the problem of how to increase them, it is easy to imagine that this problem is not going to go away.
As Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, told Econostream in an interview earlier this week, ‘this is only delta. What I’m not sure about is whether we’re going to have another Greek letter variant later this year.’
It is important to note that neither low inflation nor the persistence of the coronavirus necessarily imply a floundering economy, as illustrated by above-consensus quarterly euro area GDP growth of 2% in 2Q.
Indeed, at the last monetary policy press conference, ECB President Christine Lagarde put it rather mildly when she observed that over time, ‘the citizens, governments, health services are getting a bit more used to the responses that must be given in order to address the health of people, but also not to damage too much the economy.’
That is, it is possible to live with the virus at a tolerable economic cost, perhaps not including more severe consequences for certain sectors.
But there are those on the Governing Council who would probably be happier to see the ECB go on purchasing sovereign bonds for the foreseeable future. As de Guindos 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.’
So must the PEPP – or whatever takes on its burden under another name – ever end? At least yesterday, the ECB’s Vice President offered little reason to think so.