When will the ECB cut back the coronavirus stimulus PEPP?
Deutsche Bundesbank President Jens Weidmann.
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LONDON – European Central Bank member Jens Weidmann has said the massive coronavirus stimulus plan should be scaled back “step by step” but others are concerned about the measures being lifted prematurely.
The big question on the ECB’s table is when will the pandemic emergency purchase program – known as PEPP – be lifted, which is currently set to last through March 2022 and total 1.85 trillion euros (2.2 trillion US dollars). The ECB could end it before or after this estimated date. Market participants have asked themselves the same question in view of the stronger economic data in the euro area.
“I see two prerequisites for completely ending net purchases under the PEPP,” said Jens Weidmann, a Hawkish member of the ECB and governor of the German central bank, according to the CNBC translation at the Frankfurt Euro Finance Summit on Monday.
That would be the complete lifting of Covid-19-related restrictions like social distancing and a solid economic recovery, he added.
In order not to have to end the PEPP suddenly, however, the net purchases could be reduced gradually in advance.
The path of the pandemic is uncertain, however, and despite strong economic data in recent weeks, there are concerns that an early lifting of stimulus measures would undermine the economic recovery even further.
“When the pandemic is over and the economic consequences of the pandemic wear off, PEPP will be finalized – that was, you know, the original goal,” said Luis de Guindos, Vice President of the ECB, said CNBC’s Annette Weisbach on Monday at the same conference.
De Guindos reiterated that the Governing Council has not yet officially started talking about when the incentives should end.
“But my approach is very, very simple. I think we should try to avoid cliff effects,” said de Guindos. “I think we should try to make this as smooth as possible and always take into account the development of the economy and inflation.”
In order to avoid this so-called “cliff edge” situation, Weidmann called for the pandemic-related incentives to be withdrawn “gradually”.
“Due to the still existing uncertainty, we cannot determine the exit from the monetary policy crisis mode far in advance. In order not to have to end the PEPP suddenly, however, the net purchases could be reduced step by step in advance, ”said Weidmann.
Inflation in the euro area
The main monetary policy objective of the ECB is to keep inflation below but close to 2%. Although the region struggled to boost inflation in the wake of the global debt crisis and the sovereign debt crisis, there has recently been a massive rise in prices.
Inflation in the euro zone rose to 2% in May, slightly above the ECB’s target. This has been linked to the relaxation of the various social distancing rules in the euro-19 countries and consumer willingness to spend more.
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ECB President Christine Lagarde said earlier this month that the rise in inflation was temporary and that this indicator would remain below the bank’s target for the foreseeable future.
“Inflation has been increasing in recent months, mainly due to base effects, temporary factors and an increase in energy prices. It is expected to continue to rise in the second half of the year before declining as temporary factors subside,” she said a press conference on June 10th
However, higher inflation figures and persistently strong economic indicators are likely to fuel this debate in the Governing Council, which will meet in September.
In June, the ECB estimated that real gross domestic product will exceed its pre-crisis level from the first quarter of 2022, a quarter earlier than previously forecast.
According to Weidmann, these forecasts show that 2022 will no longer be an “extraordinary” year or a “time of crisis”, which underpins his argument for reducing monetary policy impulses.