ECB Insight: Müller Takes a Robust Stand, Adding to Hawks’ Momentum

22 September 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller on Wednesday became the latest monetary policymaker to paint a picture of the euro area economy that would be consistent with a withdrawal of support, a conclusion he was not hesitant to reach.

According to a Bloomberg interview, Müller, who heads Estonia’s central bank, regarded a post-pandemic emergency purchase programme (PEPP) increase in the ECB’s regular asset purchase programme (APP) as uncertain.

‘I realize that it would be a problem if there is a very sharp cliff effect at the end of the pandemic emergency purchase program’, he said. Müller, it seems, would be willing to accept at least somewhat of a cliff effect, perhaps even a somewhat sharp one – just not a ‘very’ sharp one. Taboo though it may be, we suspect others share that view.

Whether to expand the APP is ‘part of the discussion we will have on how to phase out PEPP and what it would mean for asset purchases going forward’, he said. ‘And of course the decision will depend on market conditions next spring and the economic outlook at that point.’

That is, while not ready to dismiss the possibility, he sees the decision as based on market and economic conditions. However, he himself judged market and economic conditions very favourably, suggesting a low willingness on his part to support a dovish outcome of the Council’s asset purchase discussion. As if to eliminate any possible doubt on this score, he drew the conclusion explicitly:

‘Given the recovery that we’re seeing in the economy, also the outlook for inflation and most importantly the extremely favourable financing conditions that we continue to have in the euro area, we should be able to end PEPP in March as it has been communicated and as it has been the original plan’, he said. ‘If you ask what is the most likely outcome then to me personally, this is the base case.’

Evidently regretting his bluntness, Müller later in the day tweeted a clarification of his position:

‘Just to be clear. We should openly discuss all options. But given the currently very favourable financing conditions and the solid recovery, I am not sure if increasing the volume of APP purchases in the spring is the best way to avoid a cliff effect.’

‘I am not sure if x’ is nothing more than a diplomatic way of saying ‘not x’. Apparently, Müller also decided that characterising financing conditions as ‘extremely favourable’ might be overreachingly honest, and in take two settled instead on the less enthusiastic ‘very favourable’.

None of which in the least obscures his opposition or the optimistic assessment it is based on, a sentiment being heard increasingly in recent days.

As reported by Econostream earlier this month as well as on June 9, the dream of some Council members to move the PEPP’s flexibility to the APP leads, Müller confirmed, through a minefield.

‘I think we need to be careful there because we might be running into some legal constraints’, he said. ‘I don’t think we can take the flexibility that was there for PEPP and just transfer it to the previous asset purchase program. It was warranted in this particular pandemic-related crisis situation.’

And Müller seconded the various other Council members, as discussed by Econostream on Monday, who have expressed varying degrees of scepticism about the ECB’s official take on inflation. In doing so, he managed to say noticeably more clearly than ECB President Christine Lagarde that medium-term inflation risks were tilted upwards.

Lagarde had sought to use the changed format of the introductory statement – rechristened the monetary policy statement following the conclusion of the strategy review – to obfuscate a bit and avoid an explicit characterisation of the balance of inflation risks on September 9.

‘Looking at possible factors that could be pushing prices higher and those that could be pulling it lower, the factors pushing prices higher seem to be stronger at the moment’, Müller said. ‘It’s more likely that we will have inflation, for example, in 2023 higher than 1.5% rather than lower. The same probably applies for the 1.7% inflation forecast for 2022.’

The robustness of Müller’s comments offers yet more reason for the doves to feel very much on the defensive. Though Executive Board member Fabio Panetta is unlikely to maintain his current stoic silence forever, those who align with him and have spoken out have not pushed back very convincingly.

With the momentum so thoroughly on the hawks’ side, and barring adverse developments, the next Governing Council meetings are shaping up at this early juncture to be tense occasions at which the views of Müller seem destined to prevail.