MNI REVIEW: Lagarde Sees Full PEPP Used Amid Shaky Recovery

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank left its policy stance

unchanged Thursday citing early signs of recovery with President Christine

Lagarde expecting to use the full EUR 1.35 trillion PEPP envelope, in contrast

to recent statements by some Governing Council members.

     Lagarde said the whole PEPP package is likely needed in the absence of

significant upside surprises. The ECB's decision said the recovery comes with

concerns over labor markets, high levels of household saving and uncertainty,

and weakness in foreign demand.

     The ECB would "never let capital key convergence impair the efficiency" of

its Covid-19 monetary policy response, Lagarde said, referring to rules that

weight sovereign bond purchases according to the population and GDP of each

member state. 

     Raising the tiering multiplier for banks' deposits with the ECB was not

discussed at the latest Council meeting, Lagarde said, adding that although the

current regime can be changed, "we don't see at the moment any particular reason

to do so."

     High frequency indicators showed a "significant, though uneven and partial"

recovery in May and June, Lagarde said, having bottomed out in April. Growth is

still weighed down by job and income losses and uncertainty around the

coronavirus pandemic.

     --DOWNSIDE RISKS

     Euro area activity is expected to rebound in Q3 as lockdowns are further

eased, Lagarde said, though uncertainty about the "overall speed and scale of

the rebound remains high," and growth risks remain tilted to the downside.

     Recent spikes in U.S. infection rates were a concern, she said, but their

possible effects had been taken into account in the ECB's various growth

scenarios.

     Strong and coordinated fiscal action remains "critical" and should be

agreed quickly, Lagarde said. 

     While pandemic measures "should as much as possible be targeted and

temporary in nature," Lagarde said, fiscal action should be withdrawn cautiously

to avoid a "cliff edge" and risks from tightening of bank financing conditions.

     --STRATEGY REVIEW

     The Governing Council statement drew attention to the "very high" take-up

of funds under the latest operation of its targeted longer-term refinancing

operations (TLTRO-III), and stressed their role in supporting bank lending to

firms and households.

     In order to reach its full potential, Lagarde said, the European Union's

Recovery and Resilience Facility "will need to be firmly rooted in sound

structural policies conceived and implemented at the national level."

     Lagarde also confirmed the ECB's monetary policy strategy review will

recommence in September and is expected to extend into the second half of 2022.

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

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

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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