MNI POLICY: PEPP Boost A 'Proportionate' Response - ECB's Lane

By Luke Heighton

     FRANKFURT (MNI) - The addition of EUR600 billion to the European Central

Bank's pandemic emergency purchasing programme was a "proportionate" response to

the rapid deterioration of eurozone economic and inflation outlooks and the

"significant" tightening of financial conditions, ECB chief economist Philip

Lane wrote in a blog post published Friday.

     Germany's Constitutional Court ruled in May that unless the Bundesbank

could demonstrate within three months the "proportionality" of the ECB's public

sector purchasing programme, it would no longer be allowed to participate in

them - casting doubt over the future of the much larger PEPP.

     "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."

     Here are key points from the article:

     - 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."

     - 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

emergency."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

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

[TOPICS: M$X$$$,M$$EC$]