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None What is the Front Line of the U.S.? The European Central Bank should keep the flexibility of its crisis-fighting quantitative easing program by providing an innovative option that can't be part of its pre-existing bond purchase tool, said Bank Governor Francois Villeroy de Galhau.
The Pandemic Emergency Purchase Program has been key across asset classes and among jurisdictions, he said. It could be worth examining if and how these two elements should be kept in our virtual toolbox. There can be various ways to keep this contingent flexibility as a virtual option and we should study them until December. The Governor s comments elaborate on speech remarks earlier this week where he called for the ECB to preserve the flexibility of PEPP. Politicians are gearing up for a showdown in December where the question of flexibility will be a point of contention.
A decision to preserve PEPP attributes would mark a significant shift for the ECB, whose quantitative easing before the pandemic was restricted by self-imposed rules strictly banning the quantity of bonds it could buy from different countries every month to ensure adherence to a treaty clause prohibiting government financing.
The Euro traded low on Friday at just under $1.16, erasing earlier gains and the dollar declined slightly. Germany bonds fell with European yields for 10 years over three basis points at -0.16%.
Villeroy said it could again be required in future to address unwarranted stressed conditions that would hamper the central bank's core price stability mission. The crisis has shown that the ECB can do this responsibly, he said, and may actually have to intervene less than it would without new powers.
We have demonstrated with PEPP our capacity to address such very particular situations with moral rigour, Villeroy said. By the way, the mere existence of this potential and contingent flexibility would have a self-stabilizing effect. The new contingent option would not necessarily be part of the ECB's longstanding QE tool, the Asset Purchase Program, which Villeroy said has its own logic and legal consistency. He proposed the APP should be made more flexible in terms of timing of purchases only.
The ECB is planning a new bond buying program to prevent any market turmoil when emergency purchases are phased out next year, officials familiar with the matter told Bloomberg last week.
Why do ECB decided to study new Bond-Buying Plan for When Crisis Tool Ends?
In the comments after meetings with counterparts around the world in Washington, Villeroy dismissed investor concerns that slower growth and a surge in inflation could herald a period of stagflation. He said that global expansion is still strong and robust and price increases are largely due to buoyant demand.
Shortfall could be a better word to describe the current situation, since price pressures are the result of shortages and should be mostly transitory, Villeroy said. Further into the future, he said there is greater risk of inflation falling short than of exceeding the target of the ECB.
The bottom line is that we need to be vigilant while remaining patient, in order to anchor inflation around 2% of the euro area in the medium term, Villeroy said.
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