ECB hawks and doves spar as tapering debate fires up
European Central Bank policymakers on Monday started a public debate about ending emergency bond purchases launched at the start of the coronavirus pandemic last year, with faultlines already emerging between so-called hawks and doves.
Germany’s Jens Weidmann and Austria’s Robert Holzmann became the first ECB rate-setters to openly debate the prospect of winding down its 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) as the economy improves. Both central bank governors are outspoken “hawks” who favour tighter monetary policy to keep inflation in check.
“In my opinion, (2022) would no longer be a year of crisis if the assumptions about the course of the pandemic and the expectations about its economic effects are essentially confirmed,” Weidmann said via video link at a German banking event.
“In order not to have to end the PEPP suddenly … the net purchases could be reduced step by step in advance.”
Holzmann echoed market expectations that PEPP will be ended at the earliest possible date, in March 2022.
“We don’t know yet but at the moment it looks like the end is in March,” he told a UBS virtual event.
But Fabio Panetta, an Italian member of the ECB’s Executive Board and vocal policy “dove”, in favour of looser policy to stimulate economic activity, warned against withdrawing support too soon as the pandemic is not yet over.
“Experience shows that attempting to reduce the pace of asset purchases too early would lead to a tightening of financing conditions and a higher pace of purchases later,” he said.
Weidmann also said new bond-buying under PEPP should only end when major economic restrictions have been lifted and the recovery is solidly underway.
The ECB has pledged to continue PEPP “until it judges that the coronavirus crisis phase is over” but has not spelled out how it will make that decision.
Panetta said the ECB should retain the ability to provide monetary support where it is most needed even after the pandemic emergency programme stops, a prospect Holzmann also mentioned.
“The pandemic emergency purchase programme has shown the benefits of flexible monetary policies when differences in financing conditions across countries represent a persistent obstacle to the transmission mechanism,” Panetta said.
Those comments could put the Italian on a collision course with influential board members such as Isabel Schnabel and Weidmann, who have both argued against retaining all of PEPP’s flexibility beyond the current crisis.
But Panetta is not alone. French central bank chief Francois Villeroy de Galhau has also made the case for “additional flexibilities” in bond buying after the crisis, particularly in terms of volumes and the allocation of funds.