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By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank's EUR750 billion pandemic
emergency purchase programme will eventually converge upon the capital key meant
to serve as a guide for its purchases of different nations' securities, vice
president Luis De Guindos said Monday.
     The ECB will use the full flexibility PEPP offers for as long as necessary,
De Guindos said, but "in the end there will be a reckoning. We will ensure
convergence to the capital key."
     De Guindos rejected suggestions the ECB was engaging in what amounts to
monetary financing, arguing instead that it is acting "solely according to the
principles of our mandate," in its efforts to combat large drops in both GDP and
inflation resulting from the coronavirus pandemic.
     "If the situation improves and the inflation outlook robustly converges to
a level which is in line with our mandate, we can return to exit mode.
     There is, De Guindos said, "no reason why inflation shouldn't increase
again," adding that although ECB forecasts are clear that consumer prices will
remain low for "some time [...] de-globalisation and the disruption of global
value chains could also be pushing inflation up."
     Asked whether the ECB should consider lowering its current inflation target
of close to, but below 2%, to somewhere between 0.5% and 1.0%, he replied that
it was "really not that simple. But yes, in the context of the strategy review,
we will be looking at the inflation target."
     The ECB has not taken "any decision" or "entered into any detail" over the
possibility of creating a 'bad bank' to absorb euro zone financial institutions'
non-performing loan stock, De Guindos said, though he stopped short of denying
it had set up a task force to look into the issue.
     The continuing problem of low bank profitability will be made "even worse"
as a result of the Covid-19 crisis, De Guindos told Der Spiegel, making a period
of "cost cutting, reducing excess capacity and - for some of them -
consolidating domestically and across borders [...] completely unavoidable."
     Asked how the ECB intends to respond to the German Constitutional Court's
May 5 ruling on the PSPP programme, De Guindos reiterated that the ECB is bound
by European, rather than national law.
     However, he said, "We stand ready to cooperate with the Bundesbank and to
provide information to facilitate the response that the German institutions have
to give to the Constitutional Court."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,M$$EC$]