FRANKFURT, May 14 (Reuters) - European Central Bank policymakers set the stage for a June 10 showdown over the future of their COVID-19 emergency bond purchases when they met in April but stopped short of discussing their next move, the account of their meeting showed on Friday.
The ECB, which is already providing record support, has helped the recession-hit euro zone economy through its worst crisis to date. But a robust recovery, coupled with a jump in inflation, will be forcing policymakers to debate whether to start dialling back the ECB’s 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP).
Arguments are stacking up fairly evenly on both sides, suggesting a difficult decision next month.
The latest wave of COVID-19 is receding, economies are reopening and growth is already surging, indicating that the “emergency”, a key premise of the ECB’s current support measures, is coming to an end.
But the 19-country currency bloc will need another year to grow back to its pre-crisis level, borrowing costs are already getting uncomfortably high and inflation, the ECB’s primary focus, will languish below its target for years to come.
“A new comprehensive joint assessment should be conducted at the next monetary policy meeting in June,” the ECB said in the account of the April 22 meeting.
Still, policymakers made it clear that even after PEPP, the ECB would provide plenty of support for years to come.
“Ample monetary policy support remained crucial beyond the pandemic period in order to support inflation and return it to the inflation aim,” the ECB added.
Concerned over the rise in yields, the ECB stepped up stimulus in March and Friday’s account indicates there was little or no appetite to revisit this decision before June.
PEPP is set to expire next March at the earliest, but the scheme, now running at around 80 billion euros a month, will not end overnight and could take several quarters to taper.
Several conservative policymakers, including Klaas Knot of the Netherlands and Martins Kazaks from Latvia, have already made the case for starting to step back from PEPP as the recovery gets underway.
But winding down the emergency scheme will be far from the end of ECB support and stimulus is likely to be transferred to the bank’s Asset Purchase Programme (APP), which operates under more rigid rules.
The key decision facing policymakers in June will be whether to signal this “rotation” from PEPP to APP is starting or conclude that emergency conditions remain.
They will also need to decide on the volume of bond purchases over the coming quarter and whether the recent rise in bond yields, fuelled in part by rising U.S. borrowing costs, is warranted by the outlook. (Reporting by Balazs Koranyi; Editing by Catherine Evans)
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