ECB’s Panetta calls for continued bond buys amid lasting pandemic

The European Central Bank must continue to keep borrowing costs in check as the coronavirus pandemic drags on and there is no sign that inflation is getting out of control, ECB board member Fabio Panetta said on Wednesday.

The ECB is expected to agree on winding down its 1.85 trillion euros Pandemic Emergency Purchase Programme next month and the debate is now on how many bonds it will buy after PEPP ends in March.

Panetta, an Italian and the most dovish of the six members of the ECB’s board, said the ECB should continue to support the bond market to reach its 2% inflation goal after this current, supply-driven surge in price fades.

“First, the surge in the number of infections and the renewed introduction of pandemic-related restrictions in some euro area countries mean that the pandemic is not over yet,” Panetta said at an event.

“Second, an inappropriate, sharp reduction of purchases would be tantamount to a tightening of the policy stance.”

He argued that the current inflation spike, which saw price growth hit 4.1% last month, was due to a mixture of “purely temporary factors” and “global supply shocks” that are hurting the economy, rather than leading it to overheat.

“We should not exacerbate the risk of supply shocks morphing into a demand shock and threatening the recovery by prematurely tightening monetary policy – or by passively tolerating an undesirable tightening in financing conditions,” he said.

“We should remain focused on completing the recovery… (and) keep using all of our instruments for as long as warranted, with the necessary flexibility.

He added that even a sharper rise in wages this year would not be worrisome.

“We should not be alarmed if we see signs of a one-off catch-up in wages next year,” Panetta said. “Over the medium term it is desirable that we see increases in unit labour costs.”
Source: Reuters (Reporting By Francesco Canepa Editing by Balazs Koranyi)