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ECB member warns against sharp policy changes

30 Mar 2021 10:59 AM

Vets Vasiliuskas, a member of the European Central Bank and Chairman of the Lithuanian Central Bank, who is stepping down from both roles next month, has warned against abandoning the emergency stimulus program as the economy recovers from the epidemic.

Vasiliuskas said that the ECB should benefit from its past experiences in tightening its monetary policy, which means a gradual return to more standard monetary instruments. He predicted that even after inflation returns to its previous trend, policymakers will need to maintain quantitative easing for a long time.

In the past decade, the European Central Bank was forced to backtrack after withdrawing monetary support too early. At the end of 2018, the ECB stopped buying bonds, only to resume within a year as the economy deteriorated, and had to reverse two interest rate hikes in 2021.

The Pandemic Emergency Purchase Programme (PEPP) of €1.85 trillion ($2.2 trillion) is set to last for another year at least, while the older quantitative easing plan put in place in 2015 is open-ended, and tied only to progress in sustainably returning inflation in the eurozone to around 2%.

The European Central Bank is accelerating its bond purchases to counter rising borrowing costs, which reflects a growing disparity between the euro-area and the United States economies. The US recovery is supported by the rapid pace of vaccine distribution and massive financial support, while the eurozone is bogged down by extended lockdowns and restrictions due to a botched vaccine rollout.

The European Central Bank expects the euro-area economy to contract in the first quarter before growing at least 1.3% each quarter, a full-year expansion of 4%, although that is not enough to offset last year's contraction of 6.6%.

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