ECB likely to signal faster money printing to combat yield rise

ECB likely to signal faster money printing to combat yield rise

News: ECB likely to signal faster money printing to combat yield rise.

FRANKFURT (Reuters) – The European Central Bank is expected to signal faster money pressures on Thursday to keep borrowing costs under control, but won’t stop adding firepower to its already aggressive pandemic fight package.

Given that a steady rise in borrowing costs could hurt the bloc’s recovery, Thursday’s ECB policymakers’ meeting will be keen to calm markets and commit to lows well into the recovery.

However, translating this commitment into specific political measures will be a delicate balancing act for ECB boss Christine Lagarde.

The ECB does not appear to be able to manage bond yields as doing so would tie their hands in the future and make allegations of protecting governments from market forces.

The eurozone central bank will also be keen not to overdo the rise in yields, which is still low by most standards. The German yield curve, the benchmark for the 19-country bloc, will remain in negative territory for up to 20 years.

Indeed, the markets have calmed down over the past week and German 10-year yields have only risen about 30 basis points since the start of the year. For the ECB, it was more decisive that the spread between German and peripheral bonds remained largely stable.

However, having already committed to “maintaining favorable financing conditions”, it cannot ignore this modest rise in borrowing costs either, as it has not been accompanied by an improvement in economic prospects and largely reflected a move in US Treasuries.

Another complication is that policymakers have already approved all of the firepower needed to combat the rise in yields. Therefore, technically no new decision is required, as the bank still has a quota of 1 trillion euros to buy bonds until next March.

However, the markets are now doubting the ECB’s engagement. The volume of purchases has actually declined in the past two weeks, confusing expectations that it will use its accented “flexibility” to advance its bond purchase in line with a series of verbal warnings from policymakers.

So Thursday’s decision will be a communication exercise where policymakers try to convince investors that flexibility is real and usable, even if it’s not mechanically tied to set goals.

“At the very least, the ECB would want to prevent yields from rising any further from current levels and would probably prefer to bring them down,” said BNP Paribas.

“We would expect an indication of a faster pace, but no firm commitment to buy specific amounts per unit of time.”

WEAK GROWTH

Disagreements among policy makers could also complicate the exercise. While some rate setters are already calling for action, conservative policymakers argue that the rise in yields has been small and at least partially justified by the brighter outlook.

Global inflation is rising and COVID-19 vaccines are being rolled out, raising hopes for an end to lockdowns. However, Europe appears to be lagging behind in recovery, making comparisons with the United States or the United Kingdom seem less accurate.

For one thing, the rise in inflation is temporary and is compounded by a number of one-off factors such as a German tax hike, statistical changes and the recovery in oil prices.

Inflation will then drop well below the ECB’s target of almost 2% percent. New employee forecasts, to be announced on Thursday, are likely to show price growth in 2023 around the level of 1.4% forecast by the ECB three months ago.

Growth is also weaker than forecast. A new wave of the coronavirus pandemic and a painfully slow vaccine rollout require longer lockdowns and challenging expectations for a rapid recovery this spring.

In contrast to the measures offered by the United States, the EU’s fiscal incentives will be modest at best, so that economies will need longer incentives for central banks.

“The margin for communication errors is decreasing. Markets are aware that the ECB does not want to be perceived as controlling yield curves, but statements that are too general or half-hearted are likely to be poorly received, ”said UniCredit economist Marco Valli.

The ECB will announce its policy decision at 1245 GMT, followed by Lagarde’s 1330 GMT press conference.

With Thursday’s decision, the ECB’s key interest rate is expected to remain at a record low of -0.5%. The total turnover for the Pandemic Emergency Purchase Program is also unchanged at 1.85 trillion euros.

Adaptation by Catherine Evans, adaptation by Larry King

Original Source © Reuters

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