MNI SOURCES: Differences Emerge Within ECB Over PEPP's Future

Differences are appearing within the European Central Bank's Governing Council over the future of its pandemic emergency purchase programme, several sources told MNI.

Policymakers are debating whether to increase the PEPP's existing EUR1.35 trillion envelope this year. Some also think that it is crucial that the programme, currently scheduled to end in June 2021, must continue to have a clear end date, as Central Bank of Malta Governor Mario Vella told MNI in an interview Aug. 6. That in turn is raising questions about how the ECB's longer-term Asset Purchase Programme might be impacted.

"I can imagine that in December – depending on the outlook and the evolution of corona – we extend the PEPP again," one source said. "After that, yes, maybe we could look at the APP again but you have to decide – is EUR20 billion enough, given the outlook?"

Further boosts to the PEPP envelope "should not be excluded," said a second source, "but I would prefer to have such a discussion in December."

"The stance is so accommodative already that you could argue we just need to give the measures we have decided already more time to play out and have their impact," a third senior official said.

"There are slightly different approaches people are taking towards PEPP," the official continued. "One might argue that you should reduce the pace of purchases just to create some additional leeway just in case there is some need for that in the coming months. But there's not too much debate on that in the Governing Council, because effectively responsibility for that has been delegated to the Executive Board."

NO IMMEDIATE RATE CUTS

Four officials said further rate cuts are not in the ECB's immediate plans, with "very little sympathy towards the idea," among Governing Council members. However, a cut of 10 to 20 basis points "would be okay," one said, while another said the ECB has yet to reach the lower bound.

An idea that could gain traction is a phased unwinding of PEPP, combined with switching resources into the ECB's regular asset purchase programmes, some officials said, though this would not be without its opponents.

"One could at least see this as a possibility," said the third official. "But some of the proponents of more, stronger stimulus might be reluctant to say that we need to be specific about winding it down by mid-2021, so I could see that being difficult."

"It's less probable that the emergency part of PEPP will end at one point in time, so phasing it out and transferring quotas to other instruments becomes more probable," said a fourth source.

One former central banker told MNI the number of Governing Council members who believe PEPP should be extended for a long time or increased is growing, but that they remain in a minority.

Even with inflation predicted to be well below the ECB's medium-term target in 2022, the fourth source said, adding to or extending PEPP would be inconsistent with the ECB's own most recent growth projections and face significant legal issues. Ending PEPP and reallocating resources into APP is therefore "quite likely an outcome" said another.

While risks remain to the downside, September's mild revisions to the ECB's official macroeconomic projections produced a "well-balanced" forecast, one official said.

"Comparing it to the last forecast in June, back then many Council members were more pessimistic … This time it was proven that the baseline was more or less accurate already three months ago, and that developments have been more favourable than people were afraid of," the official said. "On the other hand, we have a new wave of infections and it's not clear how it could all play out."

EURO STRENGTH

A worrying trend, though, is the wide variation in the economic contractions in different eurozone countries, another source said.

Most officials who spoke to MNI agreed that although the appreciation of the euro against the dollar was significant, it would be more the pace of change than any particular exchange rate level that would be key.

"It's not like we will not do anything on the exchange rate," the first official said, "but we have to wait for it to evolve and see how far it goes up."

While the dollar was undervalued, short-term exchange rate fluctuations were not overly important, another official said. But others were less sanguine, describing the effects on inflation of too strong a euro as "not trivial - we can talk about decimal points," with the change in the exchange rate level both "relatively permanent," and likely to be compounded by further strengthening.