The European Central Bank has said it will accelerate the pace of its bond buying over the next three months in response to the eurozone’s rising borrowing costs and faltering economic recovery from the coronavirus pandemic.
In its latest monetary policy decision, published on Thursday, the central bank kept its policies unchanged, but said: “Based on a joint assessment of financing conditions and the inflation outlook, the governing council expects purchases under the [pandemic emergency purchase programme] over the next quarter to be conducted at a significantly higher pace than during the first months of this year.”
The recent sell-off in bond markets risks hampering the single currency bloc’s already-stuttering recovery by pushing up the cost of finance for businesses and households, economists have warned. Despite this, the ECB has bought fewer bonds through its main pandemic-related stimulus programme in recent weeks.
Speaking at a press conference after the decision was announced, ECB president Christine Lagarde said higher bond yields could “translate into a premature tightening for financing in all sectors of the economy”.
Inflation had “picked up in recent months” but that was mainly due to “transitory factors and higher energy prices” and it was expected to remain well below the central bank’s target in the medium term, she added.
In its statement the central bank said it would “purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.
European government debt rallied strongly after the announcement. The regional benchmark 10-year German Bund fell 0.04 percentage points to its lowest level this month at minus 0.36 per cent. Yields fall when prices rise.
The yield on Italian 10-year bonds briefly dropped to its lowest level since mid-February before stabilising at 0.59 per cent, down 0.08 percentage points on the day. The spread between the Italian and German 10-year yields — a key measure of political risk in the eurozone — tightened to 0.94 percentage points, down from 0.97 earlier in the day.
Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB’s statement was “a dovish surprise” that indicated it “aims to correct the mismatch between its dovish rhetoric and apparent policy of benign neglect over the past two weeks or so”.
Some ECB officials worry the bond market sell-off will prove a headwind to eurozone nations’ economic recovery while they are still weighed down by restrictions to contain the spread of Covid-19. Others are more sanguine, arguing that higher yields reflect an improving economic outlook and that overall financing conditions are still highly favourable.
Lena Komileva, chief economist at G+ Economics, said the ECB was locked in a “new culture war” between those wanting it to maintain lower debt costs to support the recovery and hit its inflation target and those who fear it could threaten its independence by propping up over-indebted governments.
“If unresolved, this clash will undermine market confidence and ultimately lead to new financial stress as we enter the vaccine-managed endgame [of the] pandemic,” said Komileva. “The markets need a clear message about what the ECB’s targets and priorities are and what it is prepared to do to achieve them.”
The ECB left its deposit rate at minus 0.5 per cent and reiterated that its €1.85tn emergency bond-buying programme could be further expanded or not used in full, depending on its progress in stimulating a recovery in output and inflation.
The OECD this week urged the EU to accelerate its vaccination efforts and warned that persistently high rates of coronavirus infections and the sluggish pace of the vaccination programme would delay the recovery in the eurozone economy, which is heading for a second consecutive quarter of declining output in the first three months of this year.
Lagarde said that although eurozone output was likely to contract again in the first quarter, the ECB forecast for gross domestic product growth over the course of this year had increased from 3.9 to 4 per cent. She added: “Overall risks surrounding the euro area outlook have become more balanced in the medium term,” although “downside risks remain in the near term”.
The ECB increased its inflation forecast for this year from 1 to 1.5 per cent and for next year from 1.1 to 1.2 per cent. But Lagarde said these were mainly due to “temporary factors and higher energy price inflation” and it still expected inflation to be well below its target at 1.4 per cent in 2023.
Additional reporting by Joshua Oliver in London
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2021-03-11 13:22:59Z
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