ECB sees early tensions emerge over when to end crisis stimulus

LONDON: European Central Bank (ECB) tensions over how and when to discuss ending its emergency bond-buying programme are starting to bubble over into the public domain.

Little more than an hour after president Christine Lagarde said in an interview that it was “far too early” to debate when to end the stimulus, Austrian central-bank governor Robert Holzmann said the programme will end in March unless there is another severe wave of coronavirus infections.

The bond-buying programme “was established and voted for to end by March 2022, and for the time being, if nothing changes in the sense that there is no fourth or fifth confinement, it will end,” he told Bloomberg Television.

In the wake of the coronavirus pandemic, the ECB had launched its Pandemic Emergency Purchase Programme, or PEPP, which buys bonds in the region to stimulate lending and fuel an economic recovery. It left that programme unchanged at its meeting in March, with the target purchase amount still at F1.85 trillion (US$2.21 trillion or RM9.09 trillion) – which is due to last until March 2022.

The central bank is entering a tricky phase of the crisis, with the economy starting what looks like a strong recovery as infections drop but companies and households are still reliant on support.

The ECB has pledged to keep financing conditions favourable as long as needed, and most policy makers have avoided talking about an exit for fear of driving market rates higher.

“We need to really anchor the recovery,” Lagarde said in an interview with Politico. “Our projection, and the design of the pandemic emergency purchase programme as we have it, seems to be heading in the right direction” but “it is far too early to debate these issues”.

ECB officials pledged last week to continue bond-buying at a faster pace through the third quarter, even as staff raised their forecasts for the region’s economy. They now see risks to the outlook as “broadly balanced” for the first time since December 2018.

Those projections show inflation accelerating this year but then subsiding as factors such as shortages and a surge in energy costs fade. Lagarde and others have insisted that there is no reason to believe high inflation rates will become entrenched. Even so, some Governing Council members have started saying there are upside risks to the outlook for prices.

Dutch governor Klaas Knot and Germany’s Jens Weidmann both broached the topic on Friday, and Holzmann said at a briefing the same day that if inflation exceeds 3%, then policy makers would need to consider acting.

Before last week’s ECB meeting, most economists surveyed by Bloomberg predicted the institution would slow emergency bond buying as of September, and end net purchases in March.

The decision could be taken roughly at the same time that policy makers announce the results of their wide-ranging strategy review, which could include an adjustment to the inflation goal of “below, but close to, 2%”.

One option is to set a precise 2% target, with the ECB reacting symmetrically to too-low and too-high inflation. Lagarde acknowledged that while the ECB treats the current goal symmetrically, its commitments may have been “confusing for observers and for markets”.

She said she hopes the exercise will conclude toward the end of the summer, but added that “whether it is at the end of the summer or in autumn is less important than the quality of the review and the solid consensus.”