ECB’s de Cos Stresses Possibility to Reactivate PEPP; ‘Health Crisis Clearly Not over’

20 December 2021

By David Barwick – FRANKFURT (Econostream) – The crisis phase of the pandemic is by no means at an end and the European Central Bank retains the right to reactivate net purchases under the pandemic emergency purchase programme (PEPP), ECB Governing Council member Pablo Hernández de Cos said Monday.

In an interview with Spanish daily Expansión, de Cos, who heads Banco de España, said that last Thursday’s decision by the Council to end net PEPP purchases as of next March ‘reflects the fact that the negative impact of the health crisis on the medium-term inflation trend is considered to have been overcome.’

However, he said, ‘[t]he health crisis is clearly not over and we do not really know when it will end. That is why, among other factors, we have kept the option of reactivating the PEPP, if necessary.’

The lengthened PEPP reinvestment phase permits the ECB to maintain ‘a significant level of flexibility’ in its purchases, he said, advocating that PEPP-flexibility be ‘structurally built into future purchase programmes.’

‘And I stress that there is the possibility to re-activate net purchases under the PEPP, if necessary’, he added.

Still, de Cos said that although the pandemic would have a short-term impact on the economy, economic actors’ resilience has grown with each wave and restrictions like those earlier in the pandemic are unlikely to be reinstated.

‘Economic recovery is a fact’, he said. ‘And based on our forecasts, the euro area will reach pre-crisis GDP early next year. The aim now is to return to the pre-pandemic growth trend as well.’

Noting the conditions specified by the ECB’s forward guidance for an interest rate hike, de Cos said it was ‘clear that, at the present time, these conditions are not met in 2022.’ These conditions also have implications for ‘the end of the purchase programmes, because there is a link between one and the other, given that it is established that rates will not be raised until shortly after the end of the purchases’, he said.

The ECB’s guidance does not represent ‘an abstract and unconditional commitment today about the future, because the economic scenario evolves over time’, he said. What we make is a conditional commitment. In that sense, we say that, if today's conditions are maintained, we will not see rate hikes in 2022.’

Uncertainty makes it hard to go further, he said; ‘It will depend crucially on how core inflation and inflation expectations evolve.’ Currently high inflation is temporary, he said.

Separately, in an article appearing under his name in newspapers of Spanish mass media company Prensa Ibérica, de Cos said, ‘In the case of monetary policy, we in the Governing Council of the ECB are determined to continue to provide the necessary monetary stimulus to ensure that, over the medium term, inflation will durably reach the 2% target, without reacting to temporary shocks.’