MNI INTERVIEW: SEPT. KEY TIME TO JUDGE IF ECB POLICY ON TRACK

The European Central Bank's pandemic emergency purchase program should end as scheduled in mid-2021, though any decision on whether to adjust the program in the interim will depend on September's staff projections and progress towards the 2% target, Central Bank of Malta Governor Mario Vella told MNI in a video interview this week.

Although there was still uncertainty over the eurozone's recovery from the economic impact of Covid-19, it was a "temporary issue," Vella said, with the Governing Council setting "clear timelines until the end of June 2021 when the program will end".

"I don't think anybody has in mind a PEPP program for three or five years," he added.

In pragmatic comments, Vella said the PEPP could be wound down as soon as uncertainty over the strength of the recovery was removed and the "projected path of inflation towards our medium-term objective is on a sound footing."

Deputy Governor Alexander Demarco, who joined Vella for the MNI interview, agreed September's staff projections would serve as an important indicator for upcoming policy decisions, noting the data for Q2 may turn out to have been better that previously expected while the Q3 outlook was "less optimistic," reflecting the increased possibility further lockdown measures in some areas.

MALTA PICKUP

Inflation conditions remain "challenging" Demarco acknowledged, though the inclusion of real and expected fiscal support measures in the next round of projections and a recovery in energy prices "should contribute to some extent to supporting an upward trend in inflation."

Looking ahead, Vella said it was too early to pinpoint what the scale of permanent scarring to Europe's economy might be, but it "makes sense" to consider it may never return to pre-Covid growth levels in the medium-term.

Malta certainly hopes to extend its recovery deeper into Q3 and beyond, with signs already apparent that the economy has bottomed out and a recovery is underway, "although it needs to be emphasized that there is still some way to go, especially in respect of external tourism," Vella said.

CAPITAL ULTIMATELY KEY

The PEPP's overall flexibility underlines its status as an emergency measure, Vella continued, though participation will ultimately reflect member states' capital key as the ECB "cannot allow some countries to be more advantaged than others through its purchases".

Temporarily, there could be a divergence, he said, as the impact of Covid-19 on each country is not as symmetrical as the initial shock, so some short-term leeway is required."

Demarco agreed, saying adherence to the capital key in the medium-term is crucial, as "you could have countries who have it easy to issue debt and the ECB buying. That could discourage some structural reform issues if that were to be the case and could expose the ECB to legal challenge."

However, the deputy governor said the recent resurgence in cases across the continent could mean some countries not presently using a large proportion of the PEPP, or their share of the capital key, would now do so.

ERF VS ESM

European Rescue Fund assistance isn't expected to reach even those countries with the most severe liquidity shortfalls until 2021, leading to speculation that some, including Italy, may consider seeking additional support via the European Stability Mechanism.

"If assistance is required and it doesn't come from one source, it obviously means going to another watering-hole," Vella agreed, although accepting there was a degree of stigma attached to the ESM.

"But the situation may not push things that far," he continued, "given that the PEPP program is already sufficiently flexible, unless of course things get dramatically worse."

"September could be an appropriate juncture to judge whether the measures in place are still sufficient or not," he added.