MNI POLICY: Signs Full PEPP May Not Be Needed - DNB's Knot

By Luke Heighton

     FRANKFURT (MNI) - The ECB may not need to use in full the EUR 1.35 trillion

PEPP envelope as temporary crisis measures "lose traction" as the economy

stabilizes, the Netherlands central bank governor Klaas Knot said Friday

     Nor should monetary contribute unduly to perceptions of a "central bank

put," with the ECB breaking all of the downside risk to the economy leading to a

sharp increase in debt levels and excessive leverage, "as has been observed in

some segments of the corporate sector," Knot told an online forum organized by

Bloomberg.

     However, Knot said the ECB's accommodative Policy remained despite better

than expected economic data in recent weeks, as for now, the improved numbers

only solidified the central banks confidence in its "baseline scenario with a

more favourable balance of risks," with economic activity beginning to approach

the pre-pandemic level by the end of 2022.

     Recent indicators had undoubtedly surprised to the upside, Knot said with

confidence indicators showing a strong rebound in June to close an "otherwise

disastrous" Q2. Forward-looking confidence indicators had already signaled a

bottoming-out in May, while high-frequency indicators pointed to mobility

starting to recover gradually from mid-April.

     --POLICY FLEXIBILITY

     As the recovery unfolds, Knot continued, the strong rationale for increased

public sector caused by crisis-induced uncertainty should give way to a

resumption of private sector activity and the gradual withdrawal of fiscal

support - though he noted that "there are significant benefits to ensuring that

fiscal policy moves consistently with monetary policy."

     He welcomed the investments envisaged in the European Recovery Fund, the EU

Green Deal and Europe's digitalisation agenda as providing "an important signal

that we do not stop short at only stabilising our economies, but also take the

opportunity to address common longer-term challenges, thereby solidifying the

recovery to take root."

     Negative supply effects may very well gain prominence in the medium-

to-longer-run, as businesses adjust their production processes to the new

post-Covid-19 environment, Knot said, resulting on upward price pressures that

would in turn impact on "the intensity with which monetary policy can continue

to support the economy."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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