ECB’s Villeroy: Net PEPP Purchases Likely to End in March As Crisis Phase Declared Over

12 October 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau in a speech on Tuesday said that net purchases under the ECB’s pandemic emergency purchase programme (PEPP) were likely to end in March following the determination that the pandemic crisis had passed.

In December, he said, the ECB was ‘likely’ to make key decisions, ‘and not too much credence should be given to the rumours and speculation currently circulating, including a supposed advancement of the ECB's rate hike schedule.’

If there is a decision by the Governing Council that the crisis phase of the pandemic has passed, this would lead to the end of net purchases under the PEPP in March, he said. ‘As things stand, this is likely to be the case.’

One of the ‘main lessons from the success of the PEPP’, he said, is that ‘the flexibility of the PEPP across jurisdictions and asset classes is a powerful and innovative way to achieve the right monetary policy transmission.’

The turmoil the PEPP addressed in March 2020 could reoccur, independent of the pandemic, so that ‘it might be useful to consider whether - and if so how - to keep even some of the PEPP flexibility elements in our "virtual" toolbox’, he said.

‘Their mere existence and the theoretical possibility of their use would mean that we would probably not need to actually use them’, he added.

Villeroy asserted that making the asset purchase programme (APP) more flexible would be even more useful than simply increasing APP purchase volumes.

When the ECB adapted its forward guidance on interest rates to correspond to the new strategy, ‘we decided to reflect at a later stage - i.e. in December - on a possible adjustment of our forward guidance on the APP’, he said.

Villeroy voiced support for continuing the ECB’s targeted longer-term refinancing operations (TLTROs) ‘in one form or another, as a safety net, also to avoid possible cliff effects related to future repayments.’

He called however for ‘a careful recalibration of the rate conditions’, as the currently ‘generous conditions’ involving rates as much as 50 basis points below the deposit facility rate ‘are no longer justified.’

The rebound of inflation ‘is fuelling a lively public debate, but we need to be vigilant without getting too excited: clearly, there is no stagflation’, he said. ‘This rebound is mainly the result of several temporary factors, as my ECB colleagues Philip Lane and Isabel Schnabel have already pointed out.’

Monetary authorities’ ‘central scenario’ suggests that the contribution to inflation of constraints affecting the supply of goods ‘will ease over the next few quarters, but the exact timing of this easing remains uncertain’, he said.

While some prices are already redescending, other still ongoing sources of price pressures mean that ‘we cannot rule out the possibility that supply bottlenecks will postpone the date at which inflation will start to return to trend.’

Still, Villeroy said he saw ‘few signs of a wage-price spiral’ and ‘little evidence of general wage increases’, which he suggested might be ‘needed in some sectors of the economy to make jobs more attractive and reduce labour shortages.’

Noting the ECB’s 2023 HICP forecast of 1.5%, he admitted that it ‘may be at risk of being revised upwards by a few decimal points, but what matters for monetary policy is the difference between actual inflation and our 2% target.’

It is thus ‘clear that the risk remains that we will not reach our inflation target in 2023 instead of exceeding it’, he said, which ‘argues for a continued accommodative monetary policy.’ The ECB is nonetheless watching closely and is capable of and willing to respond to unexpectedly persistent price pressures, he said.