MNI INTERVIEW: ECB Could Ease More This Year-De Guindos

The European Central Bank could consider additional monetary easing this year and will monitor the effect of fiscal policy on reviving the economy, its Vice President Luis de Guindos told MNI, adding that inflation will be negative or very close to zero for the rest of 2020.

While fiscal policy should be "the first line of defence" for eurozone countries hardest hit by the economic effects of Covid-19, De Guindos said in a video interview that the ECB's Pandemic Emergency Purchasing Programme still had more than half its total EUR1.35 trillion envelope available.

Asked whether the year might end without further easing if the necessary fiscal support is supplied, he replied: "We need to look at the overall picture. I would not say that that's necessarily going to be the situation.

"There is no evidence of financial tightening. This is something we have avoided. Then, we need to observe inflation developments. And we also need to keep an eye on how fiscal policy is implemented at the national and European levels."

He added: "We have not run out of ammunition at all. We extended the programme until at least mid-2021 and, if necessary, we could adjust and recalibrate it in the future. We have not taken that decision yet. And, in my opinion, it's not necessary for us to take it immediately."

SOME COUNTRIES HARDER HIT

De Guindos said it was important to focus on how some countries had been much harder hit by the economic impact of the pandemic than others.

"Some countries will clearly be below the average decline in GDP of 8%, but others will be well above. Fiscal policy has to focus on the latter group."

While a recovery in output is likely next year, when prices should rebound as one-off effects of VAT cuts in Germany and Ireland fade and the decline in the price of oil is arrested, the outlook for 2020 is problematic.

"We are discounting that for the rest of the year the inflation rate will be negative or very close to zero," De Guindos said, although he noted that reshoring of supply chains, could help support demand.

Asked whether the ECB could transfer some of the PEPP's flexibility to its more established quantitative easing programme, De Guindos said that that possibility had not been discussed in the Governing Council.

But he added: "We need to see what the structural scars of the pandemic are, and how long it's going to take to come back to the pre-COVID-19 level of output.

"On the one hand you cannot withdraw stimuli too rapidly and, on the other hand, you have to be careful about the side effects of stimuli being too large," he said. "We need to convert the cliff edge into a ramp, and the ramp has to go in parallel with the trajectory of the economy."

STRATEGY REVIEW

Asked whether the ECB could follow the Fed in adopting average inflation targeting as it undertakes its own strategy review, De Guindos noted that the U.S. central bank had a dual mandate whereas the ECB concentrated on inflation.

"Observers are going to pay a lot of attention to the issue of the definition of price stability – whether and how it evolves. But in my view the key element of our discussion is going to be the instruments," he said. "How the instruments are pursued. How effective are they, what the potential side effects are. This is the most important part of the strategy review. But this is just a personal view."

Also relevant, De Guindos said - echoing President Christine Lagarde's recent call to address climate risks, finance green transition, and make sure labour markets remain inclusive - is the ECB's secondary mandate to support the European Union's broader economic aims.

"Climate change is becoming a financial risk," he said, noting that this could affect the ECB's asset purchases via changes in credit ratings, and adding that social inclusion was also important, although this was better suited to be addressed by fiscal policy.