Kazaks Says Extending Pandemic Program Is a Reasonable Step

The following are the highlights of an interview with European Central Bank Governing Council member Martins Kazaks conducted on Nov. 30. Click here to read the Bloomberg story.

On economic outlook

“There is now a very clear understanding that what we’re dealing with is not one single wave of the pandemic, but we are dealing with consecutive waves.”

“For the economy, that means it’s going to take longer to recover and the weakness is going to continue into the next year. The next year’s growth numbers are going to be significantly lower than we had expected prior to the second wave.”

On extending emergency bond buying

Kazaks Says Extending Pandemic Program Is a Reasonable Step

“The expansion of the Pandemic Emergency Purchase Program envelope will very much depend on how we see the development of COVID-19, but extending it by another six months, or even by another full year would be a reasonable step.”

“We need to bear in mind that the pandemic program is an emergency instrument, and it shouldn’t go on longer than until we return to pre-COVID-19 level of the gross domestic product. So right now my preference would be an extension by another six months, but if there is a proposal to extend it by another year I wouldn’t oppose it.”

On the size of the pandemic purchase program

“I think that the extension in time would come along with an extension in the size. But it does not have to be linear. It can’t be a simple extrapolation of an average volume of monthly purchases, which is then multiplied by six or 12 months. The important thing to stress is that we don’t need to use the whole package and the total size would show the maximum of what we think would be necessary.”

“Obviously we still need to a look at the data to see how things develop, and then react accordingly. I don’t want to pre-commit myself to a specific number, but the 500 billion euros ($603 billion) expected by economists doesn’t sound very off the mark. It’s a reasonable number.”

On targeted longer-term refinancing operations

“There are two issues to discuss when it comes to the TLTRO program: its length and conditions such as what the rate should be or what kind of assets we accept as collateral.”

“Clearly one option when we look at the current TLTRO design is to essentially increase the period of time over which the favorable rate of deposit facility rate minus 50 basis points applies.”

“But we also need to consider that at the end of the day the T in TLTRO means targeted. So we will need to discuss what we mean by that. Do we want to provide a general subsidy or it should be linked closer to the lending story. Maybe the banks should be given better conditions if they grow their loan book instead of keeping it flat?”

“When you think about the current duration of TLTROs, you can consider extending them from three to five years as that would provide funding basis for banks for a longer period of time and reduce uncertainty.”

“And if you really want to make things more complicated, you can go into specific segments. It might be that large companies are less affected by the downturn and access to loans than small and medium sized companies. One could then fine-tune TLTROs, possible, toward a specific size of the companies.”

On rate cuts

“In my view this option should be on the table as a standard instrument, but I don’t think this is the time. We have other instruments that are more appropriate to be used at this juncture.”

On fiscal policy

“Fiscal policy needs to provide full-fledged support and so far we haven’t seen it yet. There are things that monetary policy cannot do. And if one asks monetary policy to over-deliver, that’s by all means not the best solution.”

“We need to do what is necessary to support the economy, but we should very clearly draw a line. It’s not funding forever, but pandemic-related. It’s going to be much clearer what happens with the economy and with the role that monetary policy plays when fiscal policy jumps in with full strength. And that’s an elephant in the room that hasn’t yet moved much and that isn’t good.”

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