Central Banks

Friday, June 5, 2020 - 07:17

MNI POLICY: PEPP Boost A 'Proportionate' Response - ECB's Lane

By Luke Heighton

FRANKFURT (MNI) - The addition of EUR600 billion to the European Central Bank's pandemic emergency purchasing programme was a "proportionate" response to the rapid deterioration of eurozone economic and inflation outlooks and the "significant" tightening of financial conditions, ECB chief economist Philip Lane wrote in a blog post published Friday.

Germany's Constitutional Court ruled in May that unless the Bundesbank could demonstrate within three months the "proportionality" of the ECB's public sector purchasing programme, it would no longer be allowed to participate in them - casting doubt over the future of the much larger PEPP.

"Once the negative pandemic shock has been successfully managed," Lane continued, "the primary focus of monetary policy can return to its underlying strategic goal of robustly achieving our inflation aim over the medium term."

Here are key points from the article:

- Two factors called for further expansion of the PEPP. "First, without a sufficient policy response, the pandemic-related negative shock to the inflation path poses a threat to medium-term price stability [...] Second, while conditions in financial markets have stabilised substantially since the PEPP announcement, the situation remains fragile."

- Extending the temporal horizon of the PEPP to "at least" the end of June 2021 "broadly aligns the purchase horizon with the horizons of our other monetary policy measures taken in response to the pandemic, such as the TLTRO III and PELTRO programmes," Lane continued.

- The decision to reinvest maturing principal payments from securities purchased under the PEPP until at least the end of 2022 corresponds with the end of the ECB's current projection horizon. "This reinvestment strategy," Lane writes, "avoids the risk of an unwarranted tightening of financial conditions at a time when the recovery from the pandemic shock remains incomplete, while also ensuring that the management of the wind-down phase will not pose obstacles for the ongoing conduct of monetary policy."

- At the same time, he adds, "it is appropriate that the reinvestment strategy for the PEPP reflects its temporary nature and link to the pandemic emergency."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,M$$EC$]

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