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--Talk Of Not Using PEPP Envelope Meant To Placate German Court
--Some Sources Sceptical Of PEPP's Temporary Nature
     LONDON (MNI) - The European Central Bank's EUR1.35 trillion Pandemic
Emergency Purchasing Programme envelope is likely to be used in full despite
suggestions to the contrary, sources told MNI, with some expressing scepticism
over the PEPP's "temporary" status and the extent to which reinvestment of
principal payments could align it with the capital key.
     Recent suggestions by Governing Council members that the PEPP's capacity
might only be partially exploited were intended to underline the programme's
"extraordinary nature" in light of the German Constitutional Court's May ruling
questioning whether the ECB's Public Sector Purchasing Programme was
proportional to the central bank's mission, one central bank source said. "We
will use it all," said another, adding that the remarks were intended to dampen
market expectations regarding another increase, while "making a proportionality
     "It's still whatever it takes - that has not gone away. But sometimes you
don't need as much," the source said. "PSPP and the programmes before that were
more or less all announced as envelope programmes," said the first source. "The
possibility that this time it may not be used fully - this is invented now."
     The PEPP's divergence from the capital key, according to which purchases of
individual eurozone countries' bonds should align with the relative size of
their economies, can be only "partially" addressed by reinvestment of principal
of maturing securities, the official continued, although the degree of tolerance
acceptable "can be discussed." The question of whether to raise issuer limits
"has not been addressed yet; it cannot be addressed," the source added.
     "The pandemic has made such limits outdated. Pre-Covid monetary rules, and
thresholds are less and less valid," the source said. "We can transcend
proportionality criteria if warranted and still operate within our mandate if
such a move is necessary to guarantee the smooth transmission of monetary
     Purchases under PEPP are expected to be subdued during July and August,
said a third eurosystem source, at around half the EUR200 billion level
conducted of late, though "that will not be a policy signal."
     While Executive Board member Isabel Schnabel has asserted that the "first
objective of the PEPP is to counter the risks to the inflation outlook over the
medium term," the source said that the facility's "stated objective" is to
repair the transmission mechanism, although "also its use can be consistent with
the aim to return inflation to its target."
     A fourth central bank official admitted to feeling "sceptical" as to the
temporary nature of PEPP, and said it would be "unfortunate" were the timing of
its winding-down to be conditional upon inflation stabilising towards the
medium-term target of close to, but below 2%.
     "Of course there is a danger that the temporary character of the PEPP might
be stretched," the official said. Discussions within the Governing Council have
been "intense" but "constructive," the official added, although "there might be
a pretty good probability that total consensus might get some cracks in the
future [...] there might be different opinions or attitudes on major decisions."
     The first source also saw the PEPP's usage being extended in time.
     "All instruments are temporary, but later on all turn out to be permanent
[...]," the official said, "albeit it's not necessary to use all parts of the
toolbox all the time."
     Next week's meeting is unlikely to produce major policy decisions, sources
agreed, with the scale of permanent economic damage and possible structural
changes caused by the pandemic on the agenda over the coming months. It is too
early to read much into surprisingly positive domestic data, they said, pointing
to weakness in orders compounded by service sector stress.
     The pandemic response is being driven by Chief Economist Philip Lane and
the Executive Board, several officials said. Lane's role has "improved
considerably after the departure of [Mario] Draghi," the first explained. "I
think he is probably the mastermind of those instruments at this stage. I think
the vision as to how to conduct this business is more or less his own."
     Schnabel is also "doing a good job and gaining in importance," said a
former senior central banker with knowledge of current Governing Council
workings. The former banker was less convinced of Lane's predominance, though
admitting that the chief economist's more expansionary tendencies had gained
ground under the current ECB presidency.
     "The main difficulty is that the factual role of Lagarde is very unclear
still," the former banker said, "She is doing a lot 'French style', outside the
meeting in bilateral personal contacts. At the same time she seems very flexible
during the meeting, not having a predefined objective or outcome in mind like
Mario, and even changing her position in the course of the meeting."
     An ECB spokeswoman declined to comment for this article.
--MNI London Bureau; +44 203 865 3829; email:
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