ECB governors expect friction with governments as end of support looms

  • 10/8/2021
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STRBSKE PLESO, Slovakia, Oct 8 (Reuters) - The European Central Bank must think about the exit from monetary and fiscal support deployed during the coronavirus pandemic even if that displeases governments, three of its policymakers said on Friday. Belgium"s central bank governor Pierre Wunsch, Slovakia"s Peter Kazimir and Slovenia"s Bostjan Vasle were discussing the end of the ECB"s extraordinary stimulus measures, a decision on which is expected in December. "Now the name of the game is exit," Wunsch said during a panel discussion with his two colleagues at an event in Slovakia. "And the exit is going to be difficult because it"s going to be about less, not more," he added.By pumping 1.4 trillion euros into the bond market since March 2020, the ECB"s Pandemic Emergency Purchase Programme (PEPP) has helped governments finance record deficits at ultra-low borrowing costs. But this bonanza was now nearing its end, the trio said. "At the moment we"re the finance ministers" best friends but that"s not going to last forever," Kazimir said on the same panel. Slovenia"s Vasle too said he saw "potential for further tensions between central bankers and governments" when the ECB normalises its policy. The ECB is widely expected to wind down PEPP in March 2022 but continue its smaller Asset Purchase Programme after that date, with the debate now focussing on how many bonds the ECB should continue to buy and for how long. "I"m not in favour of doubling the bet each time if it doesn"t work but I"m favour of being patient," Wunsch said. The ECB said in September it saw inflation at 2.2% this year, 1.7% the next and 1.5% in 2023. With prices likely to have risen by 3.4% in September, Wunsch said he thought the ECB"s latest forecasts were too low and the central bank should not overemphasise the transitory aspect of the current inflation rise. "I think inflation is going to be higher than in our last forecast," the Belgian governor said. "But the argument that part of it is going to be temporary in nature is correct. Sometimes I have the impression that we focus too much on that." He added he thought the ECB would reach its 2% inflation target sooner than expected. Markets price in some chances of a rate hike in December 2022 even if the ECB"s forecasts imply a longer period of record-low borrowing costs. "I think we should convey the message that hopefully our policy is going to work and bring inflation at some point to 2%," Wunsch said. "I think it"s going to take place faster than we thought six months ago."

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