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A suggestion that the European Central Bank could soon reduce the pace of its Pandemic Emergency Purchase Programme was an early shot in what it is set to become a fierce battle over the future of extraordinary monetary stimulus, with eurosystem sources telling MNI of deep Governing Council differences over the strength of recovery as the eurozone contends with another Covid wave.
While officials contacted by MNI were divided over recent comments by Dutch Central Bank chief Klaas Knot that improving conditions could allow purchases to be tapered in the second half, they noted that his words heralded a broader debate over the ECB's bond-buying programmes.
More dovish countries, particularly in the eurozone's south, want unconventional support to survive the PEPP's scheduled expiry next March. For the moment, there is no talk of further extending the EUR1.85 trillion programme, but some national central banks are keen for its features to be transferred to the ECB's older Asset Purchase Programme, which is currently constrained by capital key rules limiting holdings of individual eurozone governments' bonds.
Such suggestions are set to be resisted by banks such as those of Germany, the Netherlands and Austria.
HAWKS ON MANOEUVRE
"There are intense pressures from the usual hawk members of the ECB for a tighter monetary policy ahead," said one eurosystem official. "I believe that there will be a great divergence about the conduct of monetary policy in the coming six months."
Another source, close to a different national central bank which is sceptical of the need for a more extended period of extraordinarily easy policy, agreed on the rough outline of the debate at what is likely to be an otherwise uneventful meeting this Thursday.
"There will be a discussion regarding the future path of monetary policy, as some seem to be prepared to do even more (in line with [ECB President Christine] Lagarde's "fragility argumentation") and others argue that there will be normalisation in autumn," the source said. "Proponents of the second camp argue even against preparing scenarios for this forecasting round because they think the crisis will more or less be over after summer."
The Governing Council is not due to consider the pace of PEPP purchases again until June, after saying last month that it would increase them "significantly" in response to surging yields. The relatively modest pick-up in purchases since has left investors puzzled, but sources contacted by MNI were divided as to whether Knot's suggested tapering would get much of a hearing.
While one central bank official noted that the PEPP could be adjusted according to market conditions, another was dismissive.
"If I read well the lips of Madame Lagarde, she's a political animal. She can estimate the reactions in the political arena if you withdraw the PEPP right now," the official said, adding that emergency European Union Covid funds, even if they arrive as scheduled, would not substitute bond buying. The official pointed to recent comments by a Bank of America strategist alerting of the danger of a "mini taper tantrum into June", amid confusion over ECB strategy.
WHEN PEPP ENDS
But, while the hawks may be in for a struggle over bond buying in the short term, they are preparing significant resistance to any extension of extraordinary policy once the PEPP comes to an end. Bank of France Governor Francois Villeroy de Galhau has said the ECB should continue supporting the economy beyond the crisis, perhaps using a "somewhat adapted" Asset Purchase Programme.
Such comments are already raising hackles.
"I do not see a lot of possibilities to increase flexibility within the APP. The most restrictive aspect is the capital key and without [exceeding] it, other flexibilities do not help," one official said. Another said Villeroy may have been referring to increasing the size of the APP, which may not be possible due to the capital key.
"I expect this discussion in the autumn, because you have to see how successful the vaccination process is and in which state the economy will be," the second official said.
Modifications to the APP are not likely to be included in the ECB's upcoming strategy review, the official said.
This review, several officials told MNI, is likely to recommend a revision of the ECB's inflation target, making it more clearly symmetrical around a clear 2% mid-point over the medium term, meaning that it would allow an overshoot after periods of slow price increases.
An ECB spokesman declined to comment on the matters in this article.