ECB Insight: Lagarde Pivots on PEPP Future From ‘Totally Premature’ to ‘It’s Time’
28 October 2021
By David Barwick – FRANKFURT (Econostream) – Time flies at the European Central Bank, where President Christine Lagarde on Thursday unexpectedly deemed it the moment to debate, decide and announce the future of the ECB’s pandemic emergency purchase programme (PEPP).
Unexpectedly, because following the September 9 meeting of the Governing Council, Lagarde was still sticking to the spirit if not the words of her ‘totally premature’ mantra, employed at various times to dismiss questioners interested in the PEPP’s fate.
It was, she said back then, ‘really too early and unnecessary at this stage to discuss, you know, longer-term issues related to PEPP, and the term of PEPP. As I said, it will be discussed at length, we will enter into a process of a technical review, in-depth analysis of the situation.’
Fast-forward to today, and all that and more appears to have been accomplished with surprising speed, given her announcement at the post-Council-meeting press conference that she had ‘every reason to believe that [the PEPP] will come to its end’ next March.
The PEPP’s end then, while not wholly certain, was the more probable scenario, especially after unofficial ECB spokesman François Villeroy de Galhau, head of Banque de France, had already indicated as much on October 12.
But there was no apparent need to make such a determination today, unless of course Lagarde felt it necessary to appease a certain faction of the Council that has been agitating for the PEPP as an emergency measure to disappear along with the crisis phase of the pandemic.
And while Lagarde did not say the crisis phase was over, she hinted at it in her introductory statement by asserting that ‘[t]he grip of the pandemic on the economy has visibly weakened’. A formal declaration of the crisis phase’s expiry may never come, so such comments offer the clearest indication of where things stand in that regard.
To be sure, Lagarde was careful enough to note that her prediction of the PEPP’s on-schedule conclusion next March was ‘her view’. As she would however look quite foolish if it now did not end, one can pretty much rule out any other outcome.
The devil being in the details, and with many policymakers not caring all that much under which acronym the ECB buys assets, what matters most is what follows the PEPP. Here Lagarde was less inclined to volunteer information, saying merely that ‘[w]hat comes next is something that we will be debating at our next Governing Council meeting in December.’
As for the possible flexibility of the PEPP’s successor, she attempted to be somewhat more forthcoming, but didn’t entirely succeed. Her convoluted response to an interested questioner was that ‘we have demonstrated when forming PEPP under the conditions that we know that we can actually have the flexibility necessary in order to deliver on our mission of providing the monetary policy stance and transmission to deliver on our price stability mission.’
‘And we need to make sure that that remains the case’, she added. ‘We’ve demonstrated it and I’m sure that we can do so in the future.’
Will the APP or a potential entirely new asset buying programme incorporate the PEPP’s vaunted flexibility? One could be excused for being no less unsure after her answer than before it.
On the issue of whether the PEPP envelope would be depleted by end-March she at least made clear that she was not inclined to be drawn out. ‘Whether we will use the full envelope or not is to be seen and is to be a factor of favourable financing conditions’, she said. ‘So, I cannot tell you anything one way or the other.’
As for the vast majority of observers expecting Lagarde to push back against market rate expectations at odds with the ECB’s new forward guidance, she did not entirely disappoint, but may not have been as vigorous in her pushback as many anticipated.
‘Are markets ahead of themselves?’, she asked rhetorically. ‘Not for me to say. What I have to do and what I have to assess is the validity of our analysis, and then testing our analysis, once we’ve determined that it was correct, against the conditions for our forward guidance. And … our analysis does not support that the conditions of our forward guidance are satisfied, neither at the time expected by markets of lift-off or any time thereafter soon.’
Whether it is sufficient for the ECB to reiterate, as she then did, its previously known expectations – ‘that inflation will continue to rise until the end of this year, will decline over the course of 2022 and at the end of our projection horizon will be below our target’ – remains to be seen, but leaving it where she did may have been taking a bit of a gamble.
Inflation was, not surprisingly, the main storyline of the Governing Council meeting, she said. Participants ‘talked about inflation, inflation, inflation’, she said, calling it a ‘topic that has occupied a lot of our time, a lot of our debates’.
Although ‘[w]hat is happening now’ in terms of elevated HICP was ‘clearly of concern, particularly to citizens’, she said, monetary authorities had done ‘a lot of soul-searching … and are confident’ that the view that the factors behind high inflation are temporary ‘is correct, and will lead to a decline over the course of ’22.’
Energy prices in particular would show ‘at least a stabilisation if not a decline’, she predicted, though she admitted that they ‘may reduce purchasing power in the months to come.’
Indeed, while generally characterising the recovery as still strong, Lagarde was dubious about the near term, also due to shortages that she said were hampering manufacturing. ‘These constraints are clouding the outlook for the coming quarters’, she said.
In the context of Bundesbank President Jens Weidmann’s decision to quit, Lagarde was queried about recent German monetary policymakers’ possible dissatisfaction with ECB policy. She had a ‘very good working relationship’ with Weidmann, she responded, and, studiously ignoring last week’s pointed announcement of his departure, asserted that there was ‘nothing … that would hint in the direction of what you have alluded to as the cause for stepping down.’