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ECB tapering talk 'premature' without solid recovery: board member

Digital euro not due out until at least 2026 to ensure stability, Fabio Panetta says

The euro logo in front of the headquarters of the European Central Bank in Frankfurt: ECB policymakers will meet again in June.   © Reuters

BERLIN -- The economic recovery in the eurozone is not strong enough for the European Central Bank to scale back its emergency asset buying at a June meeting, Executive Board member Fabio Panetta told Nikkei, pointing to a lack of self-sustaining growth and the risk posed by rising bond yields.

"From my viewpoint, the conditions that we see today do not justify reducing the pace of purchases," Panetta said in a recent interview, calling such talk "clearly premature."

With hopes of an economic recovery picking up as vaccinations expand, the question of when the ECB will begin winding down the 1.85 trillion euro ($2.26 trillion) Pandemic Emergency Purchase Program has attracted much attention. The central bank pledged in March to ramp up bond-buying over the following quarter, but whether it will maintain this pace beyond June remains unclear.

Panetta said the outlook for the economy "is now improving," but warned "we should be careful about declaring victory too soon." The eurozone's gross domestic product has shrunk 5.5% compared with pre-pandemic levels, and employment has yet to recover.

The Italian economist's stance puts him in contrast to such hawks as ECB Governing Council member Klaas Knot, the Dutch central bank chief, who has talked of a possible exit from the program in favor of conventional forms of support.

ECB board member Fabio Panetta said the bank's decisions "should not be swayed by narratives from abroad." (Photo courtesy of the European Central Bank)

Panetta's concerns stem from interest rate trends in recent weeks. "Financing conditions are tightening," with an "undesirable increase in yields," he said. If governments and businesses have a harder time accessing capital, demand will be depressed further from its already low levels, weighing on prices.

And with interest rates rising, "we have also seen a persistent, non-negligible appreciation of the exchange rate, which -- if sustained -- would weaken inflationary pressures," Panetta said.

ECB President Christine Lagarde said recently that the central bank is "committed to maintaining favorable financing conditions" through the program until at least next March, and that it is "far too early" to debate longer-term issues.

Inflation is on its face nearing the ECB's 2% target, with prices in the eurozone up 1.6% on the year in April. But Panetta called the increase "transitory," saying it is driven by factors such as rising global commodity prices. He sees price growth slowing from next year onward, in contrast to the U.S., where upward pressure appears stronger and more sustained.

"We should not extrapolate from what is happening in the United States," he said. "We don't expect the same kind of surging demand and tight labor markets that would generate stronger lasting price pressures."

Officials at the U.S. Federal Reserve have said discussing a plan to adjust asset purchases "might be appropriate at some point in upcoming meetings" if the economy continues making rapid progress, according to recently revealed minutes of their April policy meeting. Some central banks, such as Canada's, have already begun tapering.

But "our decisions should not be swayed by narratives from abroad," Panetta said. "Instead, they should be guided by compelling data about the euro area."

Panetta is also the point man for the ECB's work on a digital euro, which he said would not come out until 2026 at the earliest. While this is well behind China, whose central bank is set to launch a digital yuan next year, Panetta stressed that his priority is ensuring that the currency would work well for users and avoid creating instability.

"This is not a race," he said.

One of the main reasons for a digital euro, Panetta said, would be to "prevent the European retail payments market from being dominated by a handful of non-European players," which could lead to "insufficient competition and data protection."

Without Europe developing a digital payments system of its own, "our monetary and financial sovereignty would ultimately be at stake," he said.

A digital euro would carry risks of its own, such as spurring large transfers of deposits from banks, which Panetta said could "increase the risks to financial stability, especially in a crisis."

Asked whether the digital yuan could pose a threat, Panetta suggested China could serve as more of a partner than a competitor. "In the longer term, building interoperability between central bank digital currencies could reinforce their domestic benefits," he said.

"We can learn from each other and improve our understanding of the challenges that are associated with the possible introduction of a digital currency," he added.

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