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Financials

UPDATE 1-ECB to provide copious support even when PEPP ends: Knot

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FRANKFURT, May 11 (Reuters) - The European Central Bank will continue to provide copious support to a recession-hit economy even when its 1.85 trillion euro emergency bond purchase scheme ends, ECB policymaker Klaas Knot said on Tuesday.

With the recovery now underway, the emergency is also coming to an end but inflation is still too low so the ECB will need to provide support via a range of unconventional policy tools, Knot, the Dutch central bank chief, told a conference.

“The only thing we are talking about is rotation from emergency support to other forms of unconventional support,” Knot told the National Association of Business Economics.

“We will still have the old asset purchase programme, we will still have the negative interest rates in place and most importantly, the targeted longer-term refinancing operations to the banks,” he added.

Knot was among the first on the ECB’s Governing Council to make the case publicly for winding down emergency support once the recovery starts but few ECB watchers expect policymakers to dial back support at the bank’s June 10 meeting.

Knot said the economic outlook is now brighter than it has been “for a long, long time”, the service sector has turned a corner and a 750 billion euro fiscal support package from the European Union is coming.

“The Next Generation EU recovery fund is another factor that should allow us to gradually wind down the emergency asset purchases as the emergency is clearly coming to an end once we will go into 2022,” Knot said.

He also argued that the ECB may be underestimating the impact of pent up demand among households, and once forced savings are released, that could boost growth more than now thought.

Still, inflation is weak and even if price growth may be somewhat better than earlier feared, the change is not enough to result in a “fundamentally different interest rate environment”, Knot argued. (Reporting by Balazs Koranyi; Editing by Alex Richardson and Giles Elgood)

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