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MNI (London)
By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank's EUR600 billion increase to
the Pandemic Emergency Purchase Program was a "proportionate" response to the
rapid deterioration of the economic and inflation outlooks for the euro zone,
and the "significant" tightening of financial conditions caused by the
"extraordinary recession' triggered by the Covid-19 crisis, chief economist
Philip Lane wrote in a blog post published Friday.
     "Once the negative pandemic shock has been successfully managed," Lane
continued, "the primary focus of monetary policy can return to its underlying
strategic goal of robustly achieving our inflation aim over the medium term."
     Germany's Constitutional Court ruled in May that unless the Bundesbank
could demonstrate within three months the "proportionality" of the ECB's Public
Sector Purchase Program operations, it would no longer be allowed to participate
in them - casting doubt over the future of PEPP.
     Here are the key points from the article:
     --The baseline Eurosystem staff macroeconomic projection scenario
anticipates a decline in output of 13% in Q2 2020, with quarterly growth rates
of 8.3% in Q3 and 3.2% in Q4. Annual growth is projected to average -8.7% in
2020, 5.2% in 2021 and 3.3% in 2022. Headline inflation of 0.3% is expected in
2020, 0.8% in 2021 and 1.3% in 2022. Core inflation is forecast to reach only
0.9% in 2022.
     --Two factors called for further expansion of the PEPP: "First, without a
sufficient policy response, the pandemic-related negative shock to the inflation
path poses a threat to medium-term price stability [...] Second, while
conditions in financial markets have stabilised substantially since the PEPP
announcement, the situation remains fragile. This fragility underlines the
continued need for the central bank to be flexible and exercise a market
stabilisation function to the extent necessary."
     --Increasing the PEPP envelope "protects smooth policy transmission and
supports lower funding conditions for the real economy, with the aim of lifting
the medium-term inflation projection closer to the pre-crisis expected
     --Extending the temporal horizon of the PEPP to "at least" the end of June
2021 "broadly aligns the purchase horizon with the horizons of our other
monetary policy measures taken in response to the pandemic, such as the TLTRO
III and PELTRO programmes," Lane continued.
     - The decision to reinvest maturing principal payments from securities
purchased under the PEPP until at least the end of 2022 corresponds with the end
of the ECB's current projection horizon. "This reinvestment strategy," Lane
writes, "avoids the risk of an unwarranted tightening of financial conditions at
a time when the recovery from the pandemic shock remains incomplete, while also
ensuring that the management of the wind-down phase will not pose obstacles for
the ongoing conduct of monetary policy." 
     - At the same time, he adds, "it is appropriate that the reinvestment
strategy for the PEPP reflects its temporary nature and link to the pandemic
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: M$X$$$,MT$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 |