MNI POLICY: No New PEPP Review, Flexibility Transfer - Mersch

The balance of risks to the eurozone economy has improved, with further movement towards the European Central Bank's "upward scenario" possible, a senior European Central Bank official said Wednesday.

However the possibility of further Covid-related health emergencies means uncertainty remains high, Executive Board member Yves Mersch said, as he recommended the ECB should "err on the side of prudence" by continuing its Pandemic Emergency Purchase Programme (PEPP).

Mersch said he was "not aware" of the existence of a sweeping review of the PEPP, as reported earlier this week, rejecting claims that PEPP's "unconstrained flexibility" as an emergency measure could be transferred over to the ECB's standing asset purchase programs, citing legal restrictions.

APP SWITCH

MNI had previously reported that resources allocated to PEPP as part of it's EUR 1.35trn envelope could be transferred to APP, citing several senior Eurosystem officials, but did not make the same claims regarding its ability to deviate from the capital key and issuer limits.

"I can tell you that we look of course permanently at all developments," Mersch said. "Of course you can extend the temporary character [of PEPP] but the pandemic will not last forever [...] And we have publicly in the courts promised to jurisdictions what we were doing in order to protect the red lines that have been put into the Treaty, especially the monetary financing prohibition."

Overall, the risk balance may still be somewhat to the downside, Mersch, who steps down as a member of the ECB's Executive Board later this year, said. "But less so than it has been, and that led us to no change because we said we are broadly in line with our baseline.

"Looking also at new incoming information I think nothing is pointing to a further deterioration at least not on the front of prices and production," he added, with "chances to come out a bit closer to the upward scenario if the health situation is not deteriorating."

SYMMETRICAL

Mersch reiterated that the ECB's approach to inflation should be both "open-minded" and symmetric. Should the economic situation "hugely improve," he said, indicating an overshoot in inflation expectations, "our reaction should be the opposite of a reaction to a deterioration and also different from a continuation along the baseline."

However there is no reason to be complacent, he told Bloomberg in an interview, citing the need to continue to provide ample liquidity amidst "longer uncertainty," while basing future policy decisions on both the whole euro area and shutdowns in individual countries.

Europe's banks, which have "done their job" of continuing to finance the economy throughout the crisis, supported in large part by the ECB's targeted long-term refinancing and pandemic emergency long-term refinancing operations (TLTRO and PELTRO, respectively), should also be careful to avoid cliff effects when fiscal support in inevitably withdrawn, he said.

"We have also seen public guarantees that have been extremely helpful in maintaining asset quality, and we have seen the moratoria. But one day they will run off. Our concern is to avoid cliff effects."