Two ECB Officials Set High Bar for End to Crisis Stimulus Plan

(Bloomberg) -- Two European Central Bank policy makers set a high bar for a potential exit from the institution’s pandemic bond-buying program in comments suggesting they support keeping the crisis-fighting tool active for the foreseeable future.

Yannis Stournaras, Greece’s member of the ECB’s Governing Council, said the fate of the plan will depend mostly on the outlook for inflation, which currently shows consumer prices undershooting its target at least through the end of 2022.

His Cypriot colleague, Constantinos Herodotou, said declaring an end to the virus-induced crisis -- and therefore removing the need for emergency stimulus -- requires evidence of sustained market stability that would support the ECB’s inflation mandate. That assessment would need to consider the risk of new outbreaks and the availability of a vaccine.

The comments from two normally dovish ECB officials suggest how thinking on the 25-member Governing Council is evolving before a likely discussion in coming months on whether to increase or extend the 1.35 trillion-euro ($1.58 billion) program. With a rebound from the steepest recession in living memory under way, they might face opposition from more hawkish policy makers.

“We have an exit strategy,” Stournaras, the Bank of Greece governor, told Bloomberg Television in Athens when asked about the emergency bond plan. “That will depend on the evolution of inflation, mostly.”

Stournaras and Herodotou said they expect the ECB to use the entire program, which is known as PEPP.

They also struck a cautious tone about prospects for the euro-area economy. While growth is rebounding in line with the ECB’s projections, a resurgence of infections in some parts of the world is a cause for concern, according to Stournaras.

Herodotou, the Cypriot governor, said in response to questions from Bloomberg that uncertainty about the speed and scale of the recovery remains high.

Under the ECB’s projections, which will be revised in September, inflation will remain well below the target of just under 2% through at least 2022.

Data on Friday will likely show it at only 0.2% in July, according to economists surveyed by Bloomberg. Finnish Governor Olli Rehn even argued recently that the central bank is grappling with deflation risks fueled by the pandemic.

Stimulus Debate

The PEPP program is currently set to run until at least the middle of 2021 or until the Governing Council deems the coronavirus crisis to be over. Most economists surveyed before the policy meeting in July expected stimulus to be increased later this year.

ECB President Christine Lagarde has warned that prospects for a recovery remain uncertain and uneven, despite the region’s recent 750 billion-euro fiscal package aimed at helping the region’s most vulnerable nations.

Stournaras shared her caution. While “it is true that we observed a trough in April,” risks to the economy “are on the downside,” he said. Recent indicators suggest the economy is growing again after months of contraction, yet businesses are struggling to hold on to workers after an extended period of weak global trade and demand.

Herodotou laid out what he described as the right conditions to declare the crisis over, and said officials may need to consider expanding stimulus in due course.

Incoming data and projections “would need to provide evidence that market stabilization is sustainable over time and financial conditions remain supportive,” he said. “If, however, the situation worsens and economic and monetary data point towards further divergence from our medium-term inflation target, the available adjustments to our policy instruments could be considered.”

Greek Relief

Stournaras’s country has been a particular beneficiary of the ECB’s crisis response, after rules excluding its sovereign bonds from previous asset-purchase programs were waived given the unique circumstances. The ECB normally buys assets rated investment grade, a status Greece has been struggling to claw back for a decade after its central role in Europe’s debt crisis.

In the interview, the Greek central banker also said:

• The ECB is “data-driven, and data so far show a slight recovery, but we are in the baseline scenario”
• Asked whether the central bank may renew its recommendation for banks to withhold dividends into 2021, he said that decision depends on efforts to contain the pandemic.

©2020 Bloomberg L.P.