ECB Brief: Preponderance of ECB Comments Suggest 4Q PEPP Deceleration Possible

2 September 2021

By David Barwick – FRANKFURT (Econostream) – This is an overview of policy-relevant comments made in the last two weeks by European Central Bank Governing Council members, in particular such comments as may indicate how the speaker would regard a reduction in 4Q of the volume of pandemic emergency purchase programme (PEPP) purchases:

Lagarde (ECB):

  • ‘We are emerging from this pandemic, with economies that are stabilized, with, in a way, little sustained disruption. When you look at the unemployment levels in advanced economies, not much damage has remained from the pandemic. When you look at the level of GDP, the size of our economies, we will be back to where we were pre-pandemic at the end of the year. So, we really fought hard and responded well, and have come out now with a situation which still needs a lot of attention. But it seems to me now that policymakers have to be almost surgical — it's no longer a question of massive support, it's going to be a question of focused, targeted support in those sectors that have been badly hurt.’

de Guindos (ECB):

  • ‘Looking at the European economy, you can see that the recovery was very strong in the second quarter, and we believe it will continue to be fairly strong in the third and fourth quarters. Our emergency [asset purchase] programme is linked to the pandemic and its economic consequences. But one thing is clear: recent data are very positive. The European economy will be able to recover its pre-pandemic income levels by the end of this year or the beginning of next year. We will have new projections in the coming days and will take our decisions accordingly. In September we will also have to decide on the volume of purchases for the last quarter of this year. If inflation and the economy recover, then there will logically be a gradual normalisation of monetary policy, and of fiscal policy too.’

Holzmann (Austrian National Bank):

  • ‘We are now in a situation where we can think about how to reduce the pandemic special programs -- I think that’s an assessment we share. We have the opportunity to discuss how do we close the pandemic part and focus on the inflation part.’
  • ‘If enough people share my opinion, we will certainly advise the Executive Board to slow down purchases in the fourth quarter and more so in the first. We will spend as much as needed.’

Knot (de Nederlandsche Bank):

  • ‘I would expect a decision that should not be incompatible’ with the current PEPP ending date of March. ‘That would imply a reduction in the purchase pace.’
  • ‘PEPP has a clearly delineated objective -- repairing the damage that the coronavirus has inflicted on the inflation outlook … The stars are much better aligned than they have been for a long time for the return of inflation back to 2%.’
  • ‘I can understand that next week we may want to maintain some optionality, also to see how the Delta variant will play out.’

Villeroy (Banque de France):

  • ‘[W]e have made progress towards our inflation target, and that is a good thing.’ Expectations of 1.7% in five years are ‘a good measure of the effectiveness of monetary policy since the Covid crisis. We are quite close to our target of 2[%], we are still a bit below.’
  • ‘[T]here is no urgency for us to decide [about the PEPP] in our September meeting, next week. We still have a Governing Council meeting at the end of October and one in December. We have more time to decide.’
  • The ECB sets monthly PEPP purchase volumes based on financing conditions, which ‘are more favourable today than at our last meeting in June. … But if you look at real rates, net of inflation, which have even more economic reality, as inflation expectations have risen, real rates have fallen even more than nominal rates. So for us it's not a discussion of tapering, it's a question of consistency with this principle that was put in place last December, and which I think, by the way, is more sophisticated, more intelligent if you will, than the American fixed volume. Our discussion will therefore have to take account of this improvement in financing conditions.’

Weidmann (Bundesbank):

  • ‘In my view, the upside [inflation] risks currently outweigh the downside risks. … if these temporary factors lead to higher inflation expectations and accelerated wage growth, the inflation rate may also rise noticeably in the longer term.’
  • Urged avoiding an abrupt end to PEPP asset purchases via a gradual reduction ‘if the situation allows.’

Schnabel (ECB):

  • There is no reason to tighten monetary policy, ‘because monetary policy looks at inflation developments in the medium term. And on that horizon, we expect inflation in the euro area to be below our target of two per cent. As surprising as it may sound to some – we are more worried about the inflation rate being too low in the medium term rather than too high. This may change, of course, for example if trade unions were to negotiate higher wages. But appropriate wage adjustments would also be a good sign from our point of view. Increased demand on the back of higher real wages would bring us closer to our inflation target – which we have been falling short of for years – and help us escape the low interest rate environment.’

Lane: (ECB):

  • ‘The overriding aim of purchases is to maintain favourable financing conditions. Favourability is defined by whether financing conditions are sufficiently favourable to make sure we’re countering the negative pandemic shock to inflation. The other ingredient is what’s happening to financing conditions. Market interest rates have moved down compared to the peak and are now in an intermediate zone: lower than in late spring, but higher than the very low levels we saw at the turn of the year. We’ll have to assess at the September meeting the appropriate calibration for the final quarter of the year, taking into account the movement in market interest rates and the inflation outlook. But in the grand scheme of things, this is a local adjustment. Throughout the PEPP period, we have had a high rate of purchases. Purchases in the second and third quarters were significantly higher than in the first, but even in the first quarter, compared to historical norms, purchases were pretty high. Any adjustment we make within the pandemic period is within the single philosophy: maintaining favourable financing conditions. If this can be done with lower purchases, we’ll buy less. If favourable financing conditions require more purchases, we’ll conduct more purchases.’

Stournaras (Bank of Greece):

  • ‘According to most estimates, the recent jump in inflation is due to temporary factors related to various supply-side bottlenecks caused by the pandemic. Wage developments and unit labour costs, which determine the core of inflation, do not show the same volatility as headline inflation. On this evidence, I would advise caution regarding the course of inflation relative to our medium-term target.’

Rehn: (Bank of Finland)

  • The ECB ‘should avoid the mistakes that were done in 2011 with early rate raises’ and be mindful that ‘the role of monetary policy is to ensure that we will not face a sudden setback in economic recovery.’
  • ‘The medium-term inflation outlook is probably the same as in the June forecast, according to my reading. This means that inflation remains well below our new symmetric 2% target, which justifies the continuation of the accommodative monetary policy stance.’
  • Deemed it too early to confirm an ending date for the PEPP: ‘There is still plenty of uncertainty in the global economy and in the euro area, mainly because of the spread of the Delta variant and because of the slow pace of vaccination in some parts of the world. So we are not out of the troubled waters yet.’
  • ‘It is always essential to have a smooth transition from forceful economic policy measures and that goes for the PEPP as well. I'm certain that we will in due course, once the time is ripe, find a viable and workable solution to this challenge as well.’