ECB’s Kazaks Says June Decision to Slow Bond-Buying Possible
The European Central Bank could decide to scale back its emergency bond-buying program as early as next month if the euro-area economy doesn’t deteriorate, according to Governing Council member Martins Kazaks.
Kazaks, who also heads Latvia’s central bank, said the ECB’s pledge to keep financing conditions favorable remains key to determining how much support the 19-nation bloc needs to recover. While nominal bond yields have edged higher in recent weeks, those adjusted for inflation have stayed low since officials decided in March to temporarily increase the pace of their pandemic emergency purchase program.
“If financial conditions remain favorable, in June we can decide to buy less,” Kazaks said in an interview on Thursday. “Flexibility is at the very core of PEPP.
Italian benchmark bonds fell for a third day on the report, sending the 10-year yield one basis point higher to 0.93%. The euro rose 0.2% to a day high of $1.2089.
Kazaks, one of 25 policy makers on the Governing Council, said the economy will need significant monetary stimulus well beyond the end of the pandemic. That’s being delivered by emergency bond purchases, negative interest rates, and targeted long-term loans that keep banks’ credit terms for companies and households loose.
His argument suggests that further increases in market interest rates in the weeks and months to come needn’t trigger more ECB support. He said pent-up consumer demand, bank lending and spillovers from massive U.S. fiscal stimulus pose upside risks to the economic outlook.
“Will we react to all interest-rate increases? No, because interest rates at some point will need to rise,” he said. “We look at a wide set of variables, and their importance can change with time because of many factors, one of those being the stage of the recovery.”
In March, the ECB predicted growth of 4% this year. Policy makers including chief economist Philip Lane still call that realistic, even after a steeper-than-expected first-quarter slump, as the bloc finally starts to ramp up the pace of coronavirus vaccinations.
New projections in June will offer fresh insight into how long the economy will take to heal, and whether upward price pressures are becoming entrenched. Inflation rates have risen across the euro area in recent months, though policy makers say the increases largely reflect temporary factors and will prove transitory.
The ECB predicts consumer-price growth will average just 1.4% in 2023, far below its goal of just under 2%.
With the coronavirus crisis reaching what Lane has called an “inflection point,” some officials have started to publicly discuss a shift from emergency stimulus to more conventional measures.
Kazaks said there’s no current reason to believe PEPP will be extended beyond its March 2022 end-date, and said economic developments might even allow the ECB to finish the program without using up the entire 1.85 trillion-euro ($2.2 trillion) amount.
“The size of the package is not an absolute truth,” he said. “If the economy performs nicely, it’s quite likely that we will not need to spend everything.”
At the same time, it’s “premature” to talk about an exit from the pandemic program amid “still quite high” uncertainty.
“If the inflation outlook remains like the current forecast when PEPP ends, I think we would certainly discuss increasing APP,” Kazaks said, referring to the ECB’s older asset purchase program that’s currently running at 20 billion euros a month. “Monetary policy will remain very accommodative. If necessary we can also devise new instruments.”
©2021 Bloomberg L.P.