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MNI INTERVIEW:ECB Needs Limited,Flexible PEPP Successor-Kazaks


The successor to the European Central Bank's Pandemic Emergency Purchase Programme should be limited in size and duration but used flexibly, Bank of Latvia Governor Martins Kazaks told MNI.

The PEPP's active phase can end as planned in March 2022, Kazaks said in an interview, with the worst of the economic impact of the Covid-19 pandemic beginning to fade and GDP growth set to continue at a decent rate at least over the medium-term forecast horizon, barring sudden macroeconomic shocks.

Inflation, continuing to beat earlier expectations in absolute terms and likely to stay higher for longer, will likely fall to a level just short of 2% by 2023-24, albeit with upside risks, Kazaks said, adding that he expects some upward revision to December's Eurosystem staff growth and inflation projections.

The ECB should not begin to consider raising key interest rates until labour market slack disappears and wages are pushed up on a sustainable basis, he said.

"The labour market is very much the missing link. There's growing indirect evidence that wage pressures are strengthening, and we also see that producer price increases are likely to be transferred into consumer prices. But we still do not see that in actual data. So, there's no need to overreact. There will be inflation projections in December, and again in the spring, and another in the summer. Let's take it step-by-step."


The reimposition of lockdown conditions in some European countries in response to rising infection rates is unlikely to seriously dent the recovery, he said.

"The question is, what's the sensitivity of the economy to these lockdowns?" Kazaks said. "Are we talking about significantly slower growth? I don't think that they are likely to derail the overall economic recovery, so in terms of PEPP the story is relatively clear."

Ongoing support offered through the reinvestment of principal payments from PEPP should not be underestimated, he said.

"Flexibility is not disappearing, at least in my view, during the reinvestment phase. The end of PEPP does not mean that we are finishing supporting the economy. By no means, we are not withdrawing support, we are just adding less."

December's Governing Council debate over how to cushion the landing once PEPP's net purchase phase is over should adopt a solution that is both cautious and flexible, Kazaks said. MNI has separately reported that debate over post-PEPP stimulus will focus on possibly adding flexibility to an pre-existing bond purchasing scheme or on the creation of a "sleeper" PEPP to be used only at times of market stress. (See MNI SOURCES: Hawks Emboldened As ECB Nears Crunch December)

"Do we see the necessity of a temporary instrument or an add-on to avoid the risk of unwanted too sharp tightening and market? Temporary meaning limited in time with a guideline in terms of the size. But, again, if such an instrument or add-on is eventually decided to be necessary, it should be used flexibly. And we do not need to spend all of it."

Removing from current forward guidance the reference to ending bond buying under the ECB's non-pandemic-specific asset purchase programme, APP, shortly before raising rates would further signal the Governing Council's commitment to flexibility, he said, and should not be taken as a sign of either a dovish or a hawkish shift. But it is not a priority next month.

By contrast, the tightening narrative becoming established in the U.S. would be inappropriate at the current juncture in Europe's recovery, he said.

"It is a communications challenge," he said. "There are some spill-overs, and some of them are unwarranted. The euro area economy, in terms of its business cycle, is lagging behind that of the U.S., and that very clearly puts a wedge between the decisions that are made by the Fed and the ECB. The Fed is removing support. We are about to reduce the support."

MNI London Bureau | +44 20 3983 7894 |
MNI London Bureau | +44 20 3983 7894 |

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