ECB Should Weigh Yield-Curve Control, Hernandez de Cos Says

European Central Bank policy maker Pablo Hernandez de Cos says the institution should consider a policy to actively manage governments’ borrowing costs.

“Yield-curve control is an option worth exploring,” Hernandez de Cos said in an interview with the publication Central Banking. The strategy, which has been previously aired by colleagues and is used by the Bank of Japan and the Reserve Bank of Australia, typically entails policy makers setting yield targets on longer-term bonds.

“The experience of these central banks suggests that, if sufficiently credible, yield-curve control allows the central bank to achieve a yield-curve configuration with a lower amount of actual purchases, hence, enhancing efficiency,” said Hernandez de Cos, who is the chief of Spain’s central bank.

The governor noted that the policy would be more complex to implement in the euro area, which has 19 members that each issue debt. He suggested the ECB could consider targeting the region’s overnight index swap curve, adding that the central bank hasn’t discussed such a strategy and isn’t currently implementing yield-curve control.

Hernandez de Cos said adopting the policy would require the ECB to pledge to purchase whatever amount is necessary to keep yields at the targeted level, a commitment that isn’t explicit in its current Pandemic Emergency Purchase Program.

“The envelope may be increased, but that does not mean it can be raised without limit, which is a prerequisite of a pure, totally credible yield-control policy,” he said.

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