ECB’s de Cos: Financing Conditions Still Need Policy Support; ECB Hasn’t Started Tapering

17 September 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank did not initiate the tapering of its asset purchases with last week’s decision and financing conditions still very much need policy support, ECB Governing Council member Pablo Hernández de Cos said Friday.

In a speech at IESE Business School in Barcelona, de Cos, who heads Banco de España, said that ‘financing conditions remain highly volatile in the current uncertain environment and highly dependent on monetary policy support.’

The decision to reduce net asset purchases next quarter under the pandemic emergency purchase programme (PEPP) reflects the flexibility with which the ECB said it would conduct such purchases when it declared the preservation of favourable financing conditions to be its goal, he said.

‘It is important to stress, as [ECB President Christine Lagarde] did at the press conference after the meeting, that this decision does not imply the start of a gradual reduction in net purchases from the PEPP, what the Anglo-Saxons call tapering, but rather a recalibration of these purchases’, he made clear.

‘At our December policy meeting we will have the opportunity to reassess the evolution of financing conditions and the medium-term inflation outlook and, on the basis of this assessment, to readjust the pace of PEPP purchases as appropriate’, he added.

De Cos acknowledged the current ‘situation of economic recovery’, but immediately noted that it was ‘not without uncertainties and downside risks.’ In particular, the Delta variant ‘could still delay the full reopening of the economy’, he said.

Meanwhile, elevated inflation would be ‘largely transitory’, with core inflation seen strengthening ‘only gradually’, he said. The medium-term outlook ‘remains below our medium-term inflation target of 2%’, he reminded.

Since the ECB announced its new monetary policy strategy and revised its forward guidance accordingly, market expectations of interest rates and inflation ‘have evolved in line with what might be expected’, he said.

The first ECB rate hike was seen happening later, while inflation was seen slightly higher, he noted, consistent with the new inflation target and the more patient approach to tightening reflected in the new guidance.

However, given ‘various macro-financial, geopolitical and epidemiological developments’ of recent weeks, the relation between financial market indicators and the ECB’s new framework ‘should be interpreted with due caution’, he said.