MNI INTERVIEW: ECB'S PEPP Bond Buying May End June '21-Muller

--PEPP Bond Buying May End June 2021, Bank Of Estonia Governor Tells MNI

--Sees Possible "Tilted V" Recovery

By Luke Heighton

     FRANKFURT(MNI) - The bond-buying phase of the European Central Bank's

pandemic emergency purchase programme could end in June 2021, the governor of

the Bank of Estonia told MNI, stressing the PEPP's temporary nature, the lack of

need to increase its envelope, and his preference for using other monetary

policy tools to boost inflation.

     Reinvestments of principle payments of bonds bought under PEPP should run

until at least the end of 2022, Madis Muller said in an interview, adding that

there is currently no reason to expect the programme to run for longer than

announced.

     PEPP, not bound by capital keys or issuer limits on holdings of sovereign

bonds, had proved a "very useful" response to the Covid-19 crisis, Muller said,

"so if in the future we have a similar crisis that requires very decisive action

from the central bank I wouldn't exclude the possibility of introducing a

similar programme again."

     But, he added, "the fact that it is temporary makes it easier to allow such

flexibility, and this is something that helped the Council to approve it." The

PEPP should converge towards the capital key "to the extent that it is

possible."

     --CAPITAL KEY

     Avoiding deviation from the capital key is of even greater importance for

the ECB's other asset purchase programmes, he continued, "otherwise it

undermines the fact that we need to have a single monetary policy for the entire

euro area."

     How soon both PEPP purchases and reinvestments end will depend on Covid-19,

the economy and financial markets, he continued. However, "based on what we know

now I would assume that June 2021 is the end of the purchase phase, then we keep

reinvesting at least until the end of 2022."

     He added: "So far there is no indication that we should increase the size

of the programme or extend it beyond this time."

     PEPP, Muller said, "was really primarily designed to address the monetary

policy transmission problems we had and make sure that the financing of

economies wouldn't freeze up at the height of the crisis. It also has a

secondary effect on the inflation outlook, which also supports the ECB's goals.

But this is a secondary objective and impact. When it comes to the monetary

policy stance, and us trying to influence inflation and inflation expectations

over the medium and longer term, we should primarily rely on the other policy

tools we have."

     Lockdown measures are likely to be targeted more precisely in any second

Covid wave, and monetary policy responses would be determined by economic

conditions, Muller said.

     --TILTED V RECOVERY

     But the chances of a straightforward V-shaped recovery have diminished

since the ECB published forecasts in June, even though "we have moved closer to

the base case, and the most pessimistic scenario is less probable than it was

then."

     The situation looks "less optimistic" in other parts of the world, which

could have an "important impact" on the eurozone.

     "Since the contraction was so sharp I think the rebound will not look like

a symmetrical V," Muller said. "It will still take longer. Even if it is a

relatively quick recovery, it will still be a tilted V.

     While corporate bankruptcies are to be expected, the ECB will focus "first

and foremost" on inflation, while keeping in mind that monetary policy's

effectiveness depends on financial stability.

     --TIERING MULTIPLIER

     Muller saw no immediate need to adjust the ECB's tiering multiplier, which

partially shields banks' deposits at the ECB from the effect of negative

interest rates, and cited the uptake of targeted long-term refinancing

operations as evidence bank's liquidity needs are being amply met.

     TLTRO terms are "so favourable that this compensates, or more than

compensates, for pressures elsewhere, so it's not obvious that we should

increase the tiering multiplier. You don't want to reduce the incentives of

banks to lend money to corporates."

     The Governing Council has not yet discussed "at length" the possible

inclusion of so-called "fallen angels" in bond-buying operations, Muller said,

noting that "it's not traditionally the role of the central bank to take on that

much credit risk," and ECB policy helped companies by lowering rates anyway.

     Referring to May's German Constitutional Court ruling that briefly called

Bundesbank bond-buying into question, Muller said: "There are limits to the

mandate of the central bank, and we should never forget that. Having said that,

there is no question that the Governing Council has been and always is

evaluating the impact and proportionality of all its decisions.

     "For now, when it comes to PSPP for example," he continued, "we have the

ruling from the European Court of Justice that says given these specific

parameters it is in line with the law and we are not dealing with a case of

monetary financing, but it is very important that we keep this in mind. In that

sense, the issuer limits for government bonds and the capital key as a benchmark

are very important."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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