FX.co ★ Eurozone policymakers cautiously raise issue of stimulus cuts

The ECB Governing Council member, Madis Muller said that the European Central Bank would discuss increasing regular asset purchases after the pandemic came to an end. However, he doubted this increase.

While the euro zone's recovery should allow the ECB to end its 1.85 trillion-euro ($2.2 trillion) pandemic bond-buying program in March, officials will discuss how to avoid derailing the recovery when the support ends. According to Muller's interview in Tallinn, one option would be to expand the pre-crisis plan above the current 20 billion euros a month.

His remarks point to a potentially contentious debate that awaits policymakers, especially those who fear that a return to the pre-Covid system would hit heavily indebted countries that are not yet ready to function without ECB emergency support.

The Estonian central bank governor said that he became aware of problems arising in case there was an abrupt break at the end of the pandemic emergency purchasing program.

According to Madis Muller, the potential strengthening of the old quantitative easing program was a part of the discussion about how to phase out PEPP and what that would mean for asset purchases in the future. He noted that the decision would depend on market conditions the next spring and the economic outlook at that time.

Benchmark German bonds stopped declining shortly after the interview, with the 10-year yield traded slightly different about -0.32%.

This week Muller's Greek counterpart Yannis Stournaras warned against jumping to early conclusions about ending the crisis bailout. Stournaras stated it would be really arrogant to triumph.

Third parties have recently been optimistic about the eurozone's prospects. On Monday the ECB executive board member Isabel Schnabel mentioned that the recovery was on track. Besides, the ECB Vice President Luis de Guindos pointed to good results in the second and third quarters.

Muller said that with the given economic recovery and inflation outlook, and extremely favorable financing environment they still had the euro area and would be able to complete the PEPP in March as had been reported and planned. He added that he considered the most likely outcome as an ordinary one.

Like other members of the ECB Governing Council, he also noted that he was skeptical of the idea of revamping the old program to include more flexible features that helped the ECB soften the blow of the pandemic.

Madis Muller warned the ECB council members to be cautious as we could face some legal constraints. He thought that they could take the PEPP's flexibility and apply it to the previous asset purchase program. Muller added that policy would be suitable for that pandemic crisis situation.

As for inflation, the Estonian central bank governor mentioned he supported the view that prices would rise faster than the ECB's current projections indicate.

Madis Muller said that according to possible factors that could push prices up and those that could push prices down, the factors pushing prices up were stronger at the moment. He noted that it was likely to have inflation above 1.5% in 2023. He stated the same fact was probably true for the inflation forecast of 1.7% for 2022.