The central bank said in a statement on Thursday that over the next three months it expects asset purchases under its € 1.85 trillion ($ 2.2 trillion) pandemic stimulus program “to be conducted at a significantly higher pace. higher than during the first months of this year. ”
The size of the program can also be “recalibrated if necessary” to maintain favorable financing conditions that help “contain the negative shock of the pandemic in the path of inflation,” he added.
The move immediately lowered yields on the 10-year Germany benchmark, although they later regained ground. Yield on Italy’s 10-year bonds also declined before recovering slightly.
“Time will tell whether the ECB’s ‘significantly higher pace’ will suffice, given the weak market reaction today,” TD Securities strategists said in a note to customers.
Maintaining a healthy market
Bond yields have been rising in recent weeks with concerns that prices will rise when economies reopen, prompting central banks to reassure the markets that they intend to keep interest rates low and maintain stimulus measures in place. Policymakers fear that a sudden increase in rates could stifle activity and spell trouble for governments that have borrowed staggering amounts to rescue their economies.
Thursday’s announcement may provide some assurance.
“The central bank has just announced an increase in the pace of [quantitative easing] … in response to what is really a small increase in bond yields, “said Claus Vistesen, chief economist for Europe at Pantheon Macroeconomics, in a research note. This” tells us a lot “about the ECB’s willingness to respond to a change in conditions, he added.
Speaking to reporters, President Christine Lagarde emphasized that the central bank is watching inflation closely, but will “see through” any price jump due to one-off factors, such as the return of higher taxes on goods and services in Germany .
The ECB said on Thursday that it expects inflation to rise sharply from 0.3% in 2020 to 1.5% in 2021. The central bank believes inflation may crawl just above its target to reach 2% in the past few years. three months of this year, before falling backwards to 1.2% in 2022.
Lagarde said the ECB has not yet considered the consequences of President Joe Biden’s $ 1.9 trillion stimulus plan, approved by Congress on Wednesday. She said the legislation “will have an impact” on economic projections, but the effect should not be “overestimated”.
Europe is mired in a double-dip recession, with GDP expected to contract slightly in the first quarter, after months of blockages in large parts of the region. The slow release of the vaccine will also weigh on the recovery.
Still, the risks surrounding the outlook for Europe are starting to look “more balanced,” said Lagarde.
“On the one hand, the best prospects for global demand driven by considerable fiscal stimulus and progress in vaccination campaigns are encouraging,” she said. “On the other hand, the ongoing pandemic, including the spread of virus mutations and their implications for economic and financial conditions, remains a source of risk of a fall.”