MNI INTERVIEW: ECB Needs Bond Buying Flexibility-Vasiliauskas

The European Central Bank needs to be "flexible" when it considers whether to extend looser rules governing its pandemic emergency purchasing programme to its pre-existing quantitative easing arrangements, the head of Lithuania's central bank told MNI.

In an interview in which he also expressed support for allowing inflation above 2% for a limited period to counter a persistent undershoot, Vitas Vasiliauskas acknowledged that the ECB's mandate is bound by a European Union Treaty that "cannot be ignored." But, when asked whether PEPP-style flexibility could be transferred to the pre-pandemic asset-purchasing programme he said: "The key word for me is flexibility. Only flexible institutions can fulfill their mandate effectively."

The ECB "should be a creative institution," he said, noting that PEPP, which is not subject to APP's restrictions on the amount of bonds it can buy from each national government, is "the newest example" of a flexible response to circumstances by the ECB, which displayed similar agility when it overhauled its price stability target in 2003 and during the financial crisis in 2011, as well as with Mario Draghi's 'Whatever it takes' remark in 2012.

MORE OPTIMISTIC THAN PESSIMISTIC

The continuing pandemic means it is still too early to discuss unwinding PEPP, Vasiliauskas said, although national and EU fiscal support for the economy, together with U.S. stimulus, meant he was "more optimistic than pessimistic."

It would be better that eurozone fiscal support continued "too long than too short," he said, adding that the release of EU recovery and resilience funds linked to structural reforms provided an historic opportunity which he hoped would not be "forgotten" by domestic policymakers.

On the subject of the ECB's inflation target - key to the ongoing strategic monetary policy review due to conclude in December - Vasiliauskas said he was "quite comfortable with the current understanding of our task. Of course, we are discussing some fine tuning, some nuances, but the general understanding of our task, I don't think will be substantially changed."

Allowing for a period of above-target inflation to compensate for a sustained undershoot would be acceptable, he said. After its own strategy review last year, the Federal Reserve said it would aim to compensate for bouts of low inflation with periods when prices increase more quickly than the targeted rate.

Asked whether the ECB should react more aggressively to inflation falling below its price stability target of close to, but below, 2% once the pandemic over, Vasiliauskas said the main driver of growth should be fiscal. "That is why we should continue with all our supportive measures now, and later we will see what fiscal policy will do for our economies, including the impact on inflation."

ANY INFLATION SPIKE TEMPORARY

Near-term, though, big changes in the economic environment are unlikely, and any increases in inflation likely to be only temporary.

No significant revisions to Eurosystem staff macroeconomic projections are likely in March and nor are major changes to the ECB's policy settings at next month's meeting of the Governing Council, Vasiliauskas said. Delays in Europe's vaccination efforts will only postpone recovery as economies adapt increasingly to Covid-19.

Uncertainty remains however as to the magnitude of bad loans likely to be left on banks' balance sheets in the aftermath of the crisis ends, he said, with many still subject to loan holidays. January's bank lending survey indicated "some possible changes in behaviour," he said, but added that current monetary policy settings are "enough."

Referring to ECB President Christine Lagarde's ambition to incorporate the fight against climate change into its policies, Vasiliauskas said the central bank needed a better understanding "what is green and what is not."

"In the short term we can do some practical steps: disclosure requirements, data collection, incorporation in modelling, research, climate stress testing, non-monetary portfolio measures," he said. "These are small steps that push us in the right direction."

But, he added: "Such concepts as market neutrality are very philosophical, and I am a practical person," he said. Of course we are all concerned about climate change [...] But the main actor in the climate agenda is government."