ECB’s Stournaras Says Virus Bond-Plan Exit Depends on Inflation

The European Central Bank will decide when to unwind its pandemic stimulus program based mostly on how inflation develops, according to policy maker Yannis Stournaras, suggesting that emergency asset purchases may continue longer than initially anticipated. He speaks to Bloomberg TV in Athens.

The European Central Bank will decide when to unwind its pandemic stimulus program based mostly on how inflation develops, according to policy maker Yannis Stournaras, suggesting that emergency asset purchases may continue longer than initially anticipated.

Linking the fate of the stimulus plan to consumer prices signals potential support to extend the program beyond June 2021, given that inflation may remain below the ECB’s target for years. Finnish governor Olli Rehn, another policy maker, even argued recently that the central bank was grappling with deflation risks fueled by the pandemic.

“We have an exit strategy,” Stournaras, the Greek central bank chief, told Bloomberg Television in Athens, when asked about the emergency bond plan. “That will depend on the evolution of inflation mostly.”

Stournaras, who sits on the 25-member Governing Council, said he expects the ECB to use the entire 1.35 trillion-euro ($1.58 billion) program known as PEPP. He also said the euro-area economy is rebounding in line with the central bank’s projections, though a resurgence of infections in some parts of the world is a cause for concern.

Under the ECB’s projections, which will be revised in September, inflation will remain well below the target through 2022 at least. Data on Friday will likely show it at just 0.2% in July, according to economists surveyed by Bloomberg.

But with the rebound from the steepest recession in living memory under way, attempts to extend PEPP could trigger opposition from policy makers who worry about hooking financial markets on long-term ECB support.

ECB President Christine Lagarde has warned recovery prospects remain uncertain and uneven, despite the recent 750-billion euro fiscal package aimed at helping the region’s most vulnerable nations.

Stournaras shared her caution. While “it is true that we observed a trough in April,” risks to the economy “are on the downside.” Recent indicators suggest the economy is growing again after months of contraction, yet businesses are struggling to hold on to workers after an extended period of weak global trade and demand

Stournaras’s native Greece has been a particular beneficiary of the ECB’s crisis response, after rules excluding the country’s sovereign bonds from previous asset-purchase programs were waived given the unique circumstances. The ECB normally buys assets rated investment grade, a status which Greece has been struggling to claw back for a decade after its central role in Europe’s debt crisis.

In the interview, the Greek central banker also said:

  • The ECB is “data-driven, and data so far show a slight recovery, but we are in the baseline scenario”
  • Asked whether the central bank may renew its recommendation for banks to withhold dividends into 2021, he said that decision depends on efforts to contain the pandemic.