MNI STATE OF PLAY: ECB PEPP Purchase Slowdown Talk 'Premature'

The European Central Bank will continue to buy bonds at a significantly higher pace than during the first part of the year, president Christine Lagarde said Thursday, and branded suggestions of a discussion on when to begin phasing out such purchases as "simply premature."

Lagarde said there was no "normal" level of purchase under the ECB's pandemic emergency purchase programme (PEPP), and indicated that a phased decrease in the pace of purchases -- as recently suggested by central bank governors Robert Holzmann and Klas Knot -- had not been discussed by the Governing Council.

Talking after the ECB's Governing Council had left interest rates and other key policy settings unchanged, Lagarde cautioned against paying undue attention to weekly, rather than monthly net purchase figures, and said the pace of bond buying undertaken in the next quarter would be driven by growth and inflation data, not the calendar, with a view to returning inflation to it's pre-pandemic path.

EURO

The ECB is "carefully" monitoring the exchange rate - which has seen the euro rise above 1.20 against the USD in recent weeks - as part of its commitment maintaining favourable financing conditions for the euro area, she said. She also emphasised the "critical" role being played by the ECB's targeted longer-term refinancing operations (TLTROs) in supporting bank lending.

Hopes of a firm rebound in economic activity in the second half of the year are underpinned by expected progress with vaccination campaigns and the envisaged gradual relaxation of containment measures, Lagarde said. Overall risks to the near term euro area growth outlook continue to be on the downside, she said, though medium-term risks remain more balanced, further helped by improved prospects for global demand and sizable fiscal stimulus she added, repeating the message from the March meeting. By contrast, ongoing infections and the appearance and spread of new mutations present downside risks, Lagarde said.

FISCAL RESPONSE

Overall, while near term risks continue to be on the downside, medium-term they remain more balanced. On the one hand, better prospects for global demand – bolstered by the sizable fiscal stimulus – and the progress with vaccination campaigns are encouraging. On the other hand, the ongoing pandemic, including the spread of virus mutations, and its implications for economic and financial conditions continue to be sources of downside risk, Lagarde said.