ECB signals faster money-printing to combat rise in yields

Concerns that a rise in bond yields could derail a recovery across euro zone

The European Central Bank signalled faster money-printing on Thursday to keep a lid on euro zone borrowing costs but stopped short of adding firepower to its already aggressive pandemic-fighting package.

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 more generously over the coming months to stop any unwarranted rise in debt financing costs.

"The Governing Council expects purchases under the [programme] 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 US Treasuries rather than reflecting improved economic prospects across the euro zone.

"Increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy," ECB president Christine Lagarde told reporters during an online press conference. "This is undesirable."

Growth is actually 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.

Contracting economy

Extended virus lockdowns mean the economy is on course to contract again this quarter, Ms Lagarde said.

“Ongoing vaccination campaigns, together with the gradual relaxation of containment measures – barring any further adverse developments related to the pandemic – underpin the expectation of a firm rebound in economic activity in the course of 2021,” she added.

New forecasts Ms Lagarde revealed on Thursday were similar to the institution’s last projections released in December, with officials foreseeing growth of 4 per cent this year and inflation that never exceeds 1.5 per cent in any of the coming years. Beyond the near term, however, risks to the outlook are more balanced than they were, according to the ECB president.

The bloc’s fiscal support is modest compared with the $1.9 trillion relief package approved by the US Congress on Wednesday night.

“The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions,” the ECB said. But it also maintained its previous guidance that its Pandemic Emergency Purchase Programme quota would not necessarily be used in full, if market conditions allowed.

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