ECB’s Kazaks Says Yield Gains Won’t Always Spur More Bond Buying

The European Central Bank’s faster pace of emergency bond buying to rein in bond yields is a temporary strategy that will only last until the economy is stronger, Governing Council member Martins Kazaks said.

“If the economy performs better, it could be possible to provide less support,” Kazaks said in an interview on Friday. A “rise in yields will need to be accepted. But it should be gradual to avoid premature tightening.”

The remarks by Latvia’s governor highlight the fine line the ECB is walking as it strives to honor its pledge to keep financial conditions “favorable” through the pandemic. Policy makers have differed in their views on how much higher borrowing costs reflect budding economic optimism, and how much is an unwarranted spillover from the stronger U.S. rebound and fiscal stimulus.

ECB’s Kazaks Says Yield Gains Won’t Always Spur More Bond Buying

The central bank opted this week to accelerate its 1.85 trillion-euro ($2.2 trillion) asset-purchase program even as President Christine Lagarde said the risks to the outlook have become more balanced.

“I would like to see growth more visibly,” Kazaks said. “I want to get more confidence that this recovery is really under way. We don’t know how the third wave of Covid will play out.”

What Bloomberg Economics Says...

“The ECB remains cautious on prospects for the euro-area recovery -- underscoring its view that now is not the time for tighter financing conditions.”

--Maeva Cousin, David Powell and Jamie Rush. To read their report click here

In contrast to the U.S. and U.K., where vaccine rollouts have been far faster, the euro zone is struggling to find a way out of coronavirus restrictions. On the day Kazaks spoke, Italy announced that most of the country would be put back into lockdown to counter rising infections.

Concerns are also mounting over the European Union’s breakthrough 750 billion-euro recovery fund, with disbursements at risk of delay because of sub-standard proposals on how to spend the money.

ECB’s Kazaks Says Yield Gains Won’t Always Spur More Bond Buying

Still, surveys have consistently shown that businesses are confident the rebound has merely been delayed, and Kazaks said he’s more optimistic about the euro-area economy now than he was three months ago.

That’s in part because he expects the U.S. upturn to translate into higher demand for European goods and services, and because vaccination rates are improving.

“If we see more of this driven by the strength of the European economy, then an increase in bond yields will not necessarily mean larger purchases” of bonds, he said.

While the ECB said on Thursday that it expects growth of 4% this year, Kazaks said that estimate is likely to be revised higher at the next round of projections in June.

He played down concerns, expressed by some economists, that the bloc is headed for a destabilizing burst of inflation when consumption returns and hoarded savings are unleashed.

”It does seem unlikely that wage pressures would go up very quickly, so the inflation outlook is likely to remain quite muted,” he said.

ECB’s Kazaks Says Yield Gains Won’t Always Spur More Bond Buying

Kazaks also pushed back when asked if the Governing Council has sacrificed the much-touted flexibility of its pandemic program by committing to a higher pace for the next three months.

He said the communication about the flow of purchases had become necessary because the overall size of the program is “not that robust anymore” as an anchor for investor expectations.

Previous increases to the program had been enough to calm markets and keep a cap on yields, but more recently the Governing Council has stressed that it may not spend the full amount.

“We have to provide some other guidance, some other intermediate target. And that’s why we started to talk about favorable financing conditions,” Kazaks said. “The size of the package has not been changed, the end date has not been changed, so everything remains as it was. This time we saw the rise in long term yields being too sharp and the market not understanding our symmetric reaction function.”

He stressed that if the economy does surprise on the positive side then there will be no need to spend the full 1.85 trillion euros. But if the situation worsens dramatically, “we’ll spend all and more than that.”

He also stressed that policy makers won’t necessarily wait for scheduled meetings to take decisions.

”The Governing Council can always if necessary get together at funny hours and agree about further policies,” Kazaks said. “That is part of the deal.”

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