ECB could tweak PEPP program

LONDON – European Central Bank could tweak coronavirus-related stimulus program, German central bank governor told CNBC on Wednesday, with officials monitoring recent increases in bond yields .

ECB members have spoken out about how, at the end of February, a rise in government bond yields in the euro zone was “unwelcome and must be resisted” – expressing concerns that borrowing costs for European governments could rise and threaten the economic recovery of the region.

The ECB has sought to keep borrowing costs afloat after the pandemic, by implementing a government bond purchase program, known as PEPP. But the recent trends in the bond market could jeopardize these efforts and lead to more action from the Frankfurt-based institution.

“We have ways to deal with this,” Bundesbank governor Jens Weidmann told CNBC’s Annette Weisbach on Wednesday about the rise in bond yields.

“The PEPP comes with flexibility and we can use this flexibility to deal with such a situation,” he said.

Since it was first announced in March 2020, the ECB’s Pandemic Emergency Purchasing Program has expanded in length and size. It is currently expected to last until March 2022, reaching 1.85 trillion euros ($ 2.23 trillion).

However, data has shown that ECB debt purchases have fallen in the last few weeks. While the central bank has explained the decline in larger repurchases, analysts have questioned the reasons behind the decline in net purchases.

When asked if the ECB could reintroduce a purchase to deal with higher borrowing costs, Weidmann said: “In fact, this is one element on the table, to increase the flexibility. in implementing the PEPP. “

“But again the first step is to examine the main causes and also see what impact we have on our ultimate goal of price stability,” he said.

The next meeting of the ECB is expected on 11 March.

Weidmann has traditionally been on the hawkish side of monetary policy, advocating for less intervention from the central bank. Speaking at a press conference Wednesday, Weidmann reiterated the risks of a massive purchase of government debt.

“Such purchases, however, are also associated with risks, particularly as they can obscure the line between monetary and fiscal policy,” he said.

“The key issue for me here is that monetary policy needs to be kept at a sufficient distance from government funding. This includes ensuring that incentives for sustainable public finances are maintained,” he said.

In this context, ECB officials have suggested that they may not reach the full level of government bond purchases. Speaking in December, ECB President Christine Lagarde said “the envelope does not have to be fully used.”

Future stimulus decisions will depend on the evolution of the pandemic as well as price dynamics. The ECB’s policy mandate is to keep inflation “close to just below 2%” in the medium term. Data in January showed that inflation was rising to its highest level since the public health crisis hit, to 0.9%.

In addition to the pandemic, the ECB is also looking at climate risks. The central bank considers how to be “effective in the fight against climate change” and this could change some of its policies. However, recent reports have suggested that it may disappoint climate change campaigners by simply buying bonds of so – called greener assets.

In his own country, politicians are divided over the future of Germany’s finances, with some questioning whether the debt brake rule should be reformed. This policy was introduced about ten years ago and restricts the German government when accepting new debts.

However, some politicians argue that in order to get an economic boost after a pandemic, Berlin needs more flexibility to spend more.

At the press conference, Weidmann said: “Following the pandemic, however, it will be a matter of returning public finances to a sound position, as Germany will face further fiscal challenges in the long term. . “

He said pensions, health care, climate protection and education as important upcoming expenses for the German government.

However, Weidmann does not believe that fiscal consolidation should take place overnight, but a process that is “appropriately spread over the recovery of the economy.”

Nevertheless, he called on all European countries, not just Germany, to restore public finances.

“But all member states of the monetary union, not just Germany, have to dictate their budgets after the crisis. In the euro area, it is especially the – in some cases – very high debt ratios that need to be recovered reliably, “he said.