Euro: ECB signals faster money-printing to keep lid on yields
Concerned that a rise in bond yields could derail a recovery across the 19 countries that share the euro, the ECB said it would use its 1.85 trillion Pandemic Emergency Purchase Programme (PEPP) more generously over the coming months to stop any unwarranted rise in debt financing costs.
“The Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year,” the ECB said in a statement after its regular policy meeting.
The widely expected move comes after a steady rise in yields since the start of the year that has mostly mirrored a similar move in U.S. Treasuries rather than reflecting improved economic prospects across the euro zone.
Euro zone growth is currently weaker than forecast as a new wave of the coronavirus pandemic and a painfully slow vaccine rollout are requiring longer lockdowns, challenging expectations for a rapid rebound in the spring.
“While the overall economic situation is expected to improve over 2021, there remains uncertainty surrounding the near-term economic outlook, relating in particular to the dynamics of the pandemic and the speed of vaccination campaigns,” ECB President Christine Lagarde told a news conference.
New staff forecasts nevertheless saw slightly higher growth of 4 per cent for 2021 as a whole. The inflation forecast was also raised to 1.5 per cent from 1 per cent seen in December, although Lagarde said that reflected temporary factors and energy price inflation.
Investors had started to doubt the ECB’s commitment after bond purchase volumes actually decreased in the last two weeks, confounding expectations it would use its much-emphasised “flexibility” to run up market activity.
YIELDS DOWN
The announcement pushed bond yields lower. Germany’s 10-year yield, the benchmark for the region, extended its fall and was down 4 basis points at 1255 GMT to its lowest in over a week at -0.36 per cent.
With doves and hawks on its governing council differing on the level of urgency, the ECB said it would continue to purchase flexibly but reaffirmed that its PEPP quota would not necessarily be used in full if market conditions allow.
Lagarde said the outcome had “total consensus” on the council.
The announcement came only hours after Germany’s IWH economic institute cut its 2021 growth forecast for Europe’s largest economy to 3.7 per cent from 4.4 per cent in December, citing the risk of a third wave of the pandemic in Germany.
Lagarde said that real euro zone output would likely contract again in the first quarter of the year and stressed the patchiness of any signs of recovery. She said the longer-term inflation outlook was unchanged below its target of close to two percent.
With the bloc’s overall fiscal support seen as modest compared to the $1.9 trillion relief package approved by the United States Congress on top of earlier support, the level of future ECB stimulus is being closely watched.
For the ECB, the trick will be implementing its renewed commitment to favourable financing conditions.
It cannot appear to micro-manage bond yields, since that would tie its hands in the future and invite accusations it is shielding governments from market forces.
Policymakers are also careful not to overstate the rise in yields, which are still low by most standards. The German yield curve, the benchmark for the 19-country bloc, is still in negative territory up to 20 years.
With Thursday’s decision, the ECB’s key rate stayed at a record low -0.5 per cent. The total envelope for the Pandemic Emergency Purchase Programme was also unchanged at 1.85 trillion euros.
