MNI POLICY: PEPP Will Converge With Capital Key - De Guindos

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: luke.heighton@marketnews.com

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

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