ECB’s Schnabel: PEPP’s End ‘Can Be Expected’ in March; APP Hinges on Inflation Outlook

9 November 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s pandemic emergency purchase programme (PEPP) is likely to end next March, while what happens to asset purchases under the asset purchase programme (APP) hinges on medium-term inflation prospects, ECB Executive Board member Isabel Schnabel said Tuesday.

Speaking at a virtual conference of the ECB, Schnabel assured that the ECB’s proportionality assessment of its policies considered distributional effects. Were the desired outcome achievable with reduced side effects, the ECB ‘would need to alter the relative intensity with which we use our various instruments’, she said.

The assets now on the ECB’s balance sheet, in tandem with forward guidance, ensure that even when net asset purchases end, there will be no unwarranted tightening of long-term interest rates, she said.

As of today, an end of net purchases under the PEPP ‘can be expected to happen in March 2022’, she said. As for net purchases under the APP, these ‘will critically depend on a thorough reassessment of the medium-term inflation outlook’, she said.

‘By gradually shifting the policy mix away from net asset purchases, we will prevent the distributional footprint of our measures from increasing and mitigate financial stability risks while the economy recovers’, she said.

The appropriate policy sequencing follows from this, she suggested, as hiking interest rates before ending net purchases would imply a loss on a central bank’s stock of assets ‘that would ultimately lead to losses for the average taxpayer, and the continuation of net asset purchases would benefit mostly wealthier households.’

Forward guidance also guards against a premature policy reaction to higher inflation, she noted. The ECB takes the implications of higher inflation for purchasing power ‘very seriously’ and is aware that the burden is heavier for low-income households, she said.

However, she said, monetary policy cannot counter short-term inflation moves, so that the ECB is thus ‘focused on assessing how persistent current price pressures will ultimately be.’ Current thinking is that HICP will subside next year to below 2% in the medium term, suggesting the conditions for a rate hike ‘are very unlikely to be met next year’, she said.

In any event, a hasty policy reaction would hit low-income households hardest, she said, by hampering the recovery and job growth.

‘Nonetheless, significant uncertainty remains as to how persistent some of the current price pressures will prove to be’, she added. ‘The ECB therefore continues to carefully monitor inflationary developments in the euro area.’

Schnabel noted that central bank asset purchases had ‘triggered concerns that monetary policy may raise economic inequality by favouring those who own financial assets’, but she assigned the blame for rising inequality to structural trends ‘far beyond the realm of monetary policy’.

Indeed, she said, the pursuit of price stability ‘tends to reduce labour income inequality’ by protecting lower-income households against economic downturns. Still, with respect to wealth inequality, she conceded, ‘there is a risk that monetary policy may disproportionally benefit those in the higher ranks of the wealth distribution.’

Schnabel urged that central banks pay closer attention to house prices. The inclusion of owner-occupied housing in euro area HICP would have added 0.4 to 0.5 point to measured inflation in 2Q of the current year, she said.

‘Should we judge that differences of this magnitude are likely to persist over the medium term, they then become relevant for the appropriate calibration of our monetary policy stance’, she added.

The ECB’s view is that house prices in the region are overvalued and thus susceptible to correction, she said.