In response to the rise in interest rates observed on the markets, the ECB’s Governing Council decided unanimously on Thursday 11 March to “significantly” increase the rate of repurchases of mainly sovereign securities next quarter as part of the PEPP operation initiated in the spring of 2020 to counter the financial turmoil triggered by the Covid-19 pandemic.
“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year”, said ECB President Christine Lagarde.
Emphasising the flexibility of the PEPP operation, she recalled that the monetary authority still has some €1,000 billion in the framework of this operation, out of a total of €1,850 billion, which has been extended until at least March 2022 (see EUROPE 12620/8).
However, she refused to quantify the adverb ‘significantly’, repeatedly stressing the monetary institute’s commitment to its primary mission of inflation - ‘the anchor’ - while maintaining favourable financing conditions - ‘the compass’ - for economic operators throughout the euro area.
“We are not bound by any particular number”, Lagarde said. In her view, the significant change in the pace of repurchases will not be immediately observable, as the ECB has set “the quarter” as its time horizon, since new economic data is available every three months.
The ECB’s announcements had a strong downward impact on sovereign interest rates. Mrs Lagarde nevertheless denied any attempt by the ECB to control bond yields (‘yield-curve control’).
Does this answer live up to ECB Executive Board member Fabio Panetta’s recent call for a more ambitious monetary policy, inspired by the Daft Punk song ‘Harder, Better, Faster, Stronger’? “That fits the bill”, said Mrs Lagarde.
On Thursday, the monetary institute presented its spring forecasts for growth and inflation. It thus foresees a strong rebound in economic activity in 2021 as a result of the Covid-19 vaccination campaigns and the gradual lifting of health restrictions, despite the degree of uncertainty, which remains high. According to the ECB, GDP in the euro area will grow by 4.0% in 2021, 4.1% in 2022, and 2.1% in 2023, a scenario relatively unchanged from its December 2020 forecast. These forecasts do not include the impact of the US stimulus package that has just been put in place by the Biden administration.
On price inflation, the ECB raised its inflation forecasts for 2021 and 2022 to 1.5% and 1.2% respectively, while keeping its forecast for 2023 unchanged at 1.4%. “Overall, (price) pressures are likely to remain moderate”, she said.
Climate. The former head of the IMF was asked about the monetary institute’s policy on climate change, the day after Greenpeace criticised the European institution’s attitude towards companies active in fossil fuels (see EUROPE 12675/25).
“We are almost unanimous in the Governing Council that the climate imperatives are nothing less than imperative. This is the biggest challenge we face”, said Mrs Lagarde. Although the ECB’s primary mission remains the fight against inflation, the climate issue must be taken into account to ensure “price integrity, good risk management, appropriate supervision”, she added.
The same applies to the way in which the collaterals that banks provide to the ECB during refinancing with the bank are valued. (Original version in French by Mathieu Bion)