ECB signals faster money-printing to keep lid on yields

FRANKFURT: The European Central Bank announced on Thursday that it would accelerate money pressures to keep borrowing costs under control in the eurozone and signaled to skeptical markets that it was determined to lay the foundations for a solid economic recovery.
Concerned that an increase in bond yields could ruin a recovery in the 19 countries that share the euro, the ECB said it would keep its 1.85 trillion pandemic emergency purchase program (PEPP) in the Be more generous in the coming months to stop an unjustified surge in debt financing costs.
Sources told Reuters that policy makers had set a monthly goal but agreed not to disclose it. The purchases would not be as high as the € 100 billion per month the ECB bought in spring 2020, but would still be well above the € 60 billion in bonds it raised in February.
“The Governing Council expects the PEPP purchases in the next quarter to be at a much faster pace than in the first few months of this year,” the ECB said in a statement following its regular political meeting.
The widely anticipated move can be attributed to a steady increase in yields since the start of the year, largely due to a similar shift in US Treasuries, rather than reflecting the improved economic outlook in the Eurozone.
Germany’s 10-year return, the benchmark for the region, extended its decline after the decision and came in at -0.33% at 1635 GMT.
ECB President Christine Lagarde said the Council was in “total consensus” but the sources said there was some disagreement.
According to one source, the ECB was aiming to push yields close to December’s level, when Germany’s 10-year yield hit -0.64%, while another said improved economic outlook was part of the recent increase in yields justified.
The ECB said it would continue to shop flexibly, but reiterated that its PEPP quota would not necessarily be fully used if market conditions allowed.
The inclusion of this caveat was a necessary concession to keep the “hawks” on board who were skeptical of increasing bond purchases, one of the sources said.
Investors had begun to doubt the ECB’s commitment after buying volumes actually fell for the past two weeks, confusing expectations that it would use its stressed “flexibility” to stimulate market activity.
The sources said any new change in the pace of bond purchases would have to be decided by the Governing Council based on a number of indicators of the funding terms agreed at Thursday’s meeting, coupled with the inflation outlook.
The Executive Board of the ECB would simply pursue this goal with a small tolerance band.
Eurozone growth is currently weaker than forecast as a new wave of the coronavirus pandemic and painfully slow adoption of vaccines require longer lockdowns and call into question expectations for a swift spring recovery.
“While the macroeconomic situation is expected to improve over the course of 2021, there remains uncertainty about the short-term economic outlook, particularly the dynamics of the pandemic and the speed of vaccination campaigns,” Lagarde told a press conference.
The forecasts for new employees nevertheless saw growth of 4% for the year 2021, which was slightly higher than forecast in December. The inflation forecast has also been raised from 1% to 1.5%, although Lagarde said it reflected temporary factors and energy prices.
Lagarde said the eurozone economy is expected to contract again in the first quarter of 2021, stressing the inconsistency of any signs of recovery. She said the longer-term inflation outlook was unchanged below her target of nearly 2 percent.
Given the overall modest fiscal support for the bloc compared to the $ 1.9 trillion additional bailout package approved by US Congress on Wednesday, the magnitude of future ECB incentives will be closely monitored.
The trick for the ECB is to implement its renewed commitment to favorable financing terms.
It does not seem possible to manage bond yields as doing so would tie his hands in the future and make allegations of protecting governments from market forces.
Policymakers are also careful not to overdo the growth in earnings, which is still low by most standards. The German yield curve, the benchmark for the 19-country block, is still in negative territory for up to 20 years.
With Thursday’s decision, the ECB’s key interest rate remained at a record low of -0.5%. The total turnover for the pandemic emergency purchase program was also unchanged at 1.85 trillion euros.

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