By Balazs Koranyi
FRANKFURT (Reuters) – The European Central Bank should focus its stimulus effort on a legacy Asset Purchase Programme when emergency support expires in March but must keep its commitment short as inflation could exceed expectations, ECB policymaker Peter Kazimir said on Tuesday.
With a crucial policy meeting coming up on Dec. 16, the ECB is weighing options for a new policy setting but uncertainty, from high inflation to a fresh pandemic wave, has kept an unusually wide range of proposals on the table, fuelling divisions among policymakers.
“We should not make too long commitments on asset purchases,” Kazimir told Reuters in a written reply to questions. “More than ever, we should stand ready to recalibrate our instrument as and when new information emerges.”
“The current calibration of purchases is a good baseline for potential downside or upside deviations we may decide in the future,” he added.
Inflation hit a record high 4.9% last month, more than twice the ECB’s 2% target and its decline next year is likely to be slower than once thought. This is raising the possibility that price growth could settle around target in the longer term, confounding the ECB’s expectation for a return to undershooting.
Kazimir, considered a conservative or hawk, joined the chorus of ECB policymakers warning that risks were skewed towards price growth exceeding the ECB’s projections.
“We have to bear in mind the context of rising inflation, which keeps beating our expectations,” Kazimir said. “Medium-term market expectations have also adjusted significantly in the direction we wanted to see and the medium to long-term risks remain skewed to the upside.”
On Dec 16, the ECB is all but certain to let a 1.85 trillion Pandemic Emergency Purchase Scheme expire on March 31 but will debate ramping up other instruments or creating new ones to make up for lost stimulus.
Kazimir argued that the ECB should revert to the Asset Purchase Programme (APP), set up in 2014, as its main quantitative easing instrument of choice and should avoid tinkering with the scheme as it has already cleared crucial legal hurdles.
“We should not overcomplicate things with new envelopes or instruments,” Kazimir said, pushing back on suggestions for an entirely new scheme.
“It is important we do not tinker with the APP,” he said. “The Public Sector Purchase Programme has all the necessary seals of approval, it is our key instrument looking ahead.”
Keeping a balanced tone, Kazimir argued that ECB must also avoid premature tightening or overreacting in either easing or tightening policy.
(Editing by Bernadette Baum)
