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The European Central Bank could top up its pre-Covid quantitative easing plan as early as its next policy meeting and could also expand its Pandemic Emergency Purchase Programme in the coming months, but not all policymakers agree on the need for immediate additional easing or on the best mechanism to provide it, ECB sources said.
While some officials want to see more data before plumping for more stimulus this year, there are growing fears of possible delays to the implementation of the European Union's EUR750 billion Covid recovery plan and a gathering consensus that the ECB's older QE arrangements under its Asset Purchase Programme should be made more flexible once the PEPP is phased out.
Several officials said extra stimulus would be best delivered in the short term by expanding the APP, whose additional EUR120 billion envelope is due to expire at the end of the year.
Asked whether the PEPP, subject to fewer restrictions on its bond buying than the APP, might be increased in December, one replied: "My guess would be more in the direction of increasing APP. PEPP has an emergency envelope, and if you do not have any emergency to tackle … from a legal point of view it would be tricky to increase PEPP."
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Increased debt issuance as governments respond to the Covid-19 pandemic means the APP's limits on purchases of individual countries' bonds would not be a problem, the source said.
"PEPP should be temporary and should be linked so some kind of market disturbances," the official said. "My bet would be to prolong and maybe increase APP, and leave PEPP as it is. Or maybe in some variation to transfer part of PEPP to APP and in addition increase APP. But I do not expect PEPP to increase, or even to be prolonged."
If APP is increased, the "strongest argument" might be for keeping monthly purchases at their current level, with a fresh EUR120 billion envelope, the source said.
"It's not worth decreasing it, and there are no arguments to increase it. Maybe some prolongation, but we are still a long way from June," the source said, referring to the PEPP's scheduled end point.
Another official agreed, saying an additional EUR20 billion a month could be assigned to the APP until mid-year. The PEPP's full envelope of EUR1.35 trillion is also likely to be used, the official said, and, given the tightening of credit conditions across the eurozone the facility will probably be extended in Q4 or Q1, increasing in size to EUR1.75 trillion. Another official said it might make sense to extend the PEPP until the conclusion of the ECB's Strategy Review in September 2021.
A eurosystem source said an announcement was possible at the ECB's Oct. 29 meeting.
"It makes sense that some members of the council would welcome an increase in APP because this might show a way how to - I wouldn't say make PEPP permanent, but to go in this direction," the source said, adding: "I think they also see it would be quite difficult to get an increase in PEPP in October."
ECB Vice President Luis de Guindos told MNI in an interview published Oct. 1 that more easing could come by the end of the year, but other officials agreed the October meeting would come too soon for additional easing.
De Guindos said the ECB still had plenty of monetary "ammunition", but one official told MNI the vice president's remark were meant to signal that any easing was more likely in December than in October. A PEPP increase, even in December, is "not a done deal yet," the official said.
"The [hawks versus doves) discussion will go on for some time," the official said, adding that the ECB's most influential voice was now that of Chief Economist Philip Lane. Disagreeing with those calling for an APP expansion, the official said it might still be easier to boost PEPP, despite potential legal problems.
One ECB source said there might be some pressure on the ECB in October to indicate a December PEPP expansion, though another spoke of "a wait-and-see majority" in the Governing Council.
"I don't expect anything soon. If something will be proposed or decided in December depends very much on the developments over the forthcoming weeks," the official said.
Another was also unsure stimulus was imminent.
"It's been four weeks since we published the last set of projections. I don't see a huge amount of evidence to say we've got to make a change."
Nonetheless the official agreed that the APP should be made more like the PEPP.
"I think one of the lessons of the pandemic is that flexibility matters," the official said. "Whether we would roll over some of the amounts into APP, that just depends on what's happening to the economy, what are our projections, what are the fundamentals. That's a separate question. But I would like that flexibility to be available as a matter of standard."
An ECB spokesperson declined to comment to MNI.