ECB retains pandemic bond purchases beyond March 2022

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The European Central Bank is likely to preserve its pandemic bond purchase programme beyond previously earmarked March, 2022 deadline. If ECB halts the bond purchase programme which was designed to offset the consequences of the Covid-19 economic downturn, it would put at risk the stability of the European financial system, Reuters reported quoting ECB board member Fabio Panetta. His statement is likely to sparkle a conflict with the more conservative members of the bank's ruling body.

Facing an unprecedented crisis, the ECB agreed on implementing flexible rules for its 1.85 trillion euro Pandemic Emergency Purchase Programme in 2020 but the scheme could end as soon as next March, raising the risk of an ECB retreat in some markets. More traditional instruments, like the Asset Purchase Programme, have relatively rigid rules, making it difficult for the ECB to focus the stimulus in certain markets or to flexibly vary the size of its intervention.

"The pandemic emergency purchase programme has shown the benefits of flexible monetary policies when differences in financing conditions across countries represent a persistent obstacle to the transmission mechanism," Panetta said."We should strive to retain the unconventional flexibility that has served us well during the pandemic," he added.

Those comments put Panetta on a collision course with influential policymakers such as ECB Executive Board member Isabel Schnabel and Bundesbank President Jens Weidmann, who have both argued against retaining all of PEPP's flexibility beyond the current crisis. But Panetta is not alone with his intended actions and comments that it was too early to limit the purchases. French central bank chief Francois Villeroy de Galhau has already made the case for "additional flexibilities" in bond buys after the crisis, particularly in term of volumes and the allocation of funds. Panetta also added that the Eurozone economic outlook was improving but the pandemic was not yet over and that cutting ECB support too soon risked having to backtrack. "Experience shows that attempting to reduce the pace of asset purchases too early would lead to a tightening of financing conditions and a higher pace of purchases later," he said.

He also downplayed voiced concerns about rising inflation, saying the current rise in prices was temporary and there were no convincing signs that this uptick would translate into a more sustained period of higher prices.

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