ECB’s Schnabel Warns Rise in Real Rates May Hurt Recovery

The European Central Bank has a close eye on financial markets because a sudden rise in real interest rates could pull the rug out from under the economic recovery, Executive Board Member Isabel Schnabel said.

“We will ensure that there is no unwarranted tightening of financing conditions,” she told LETA in an interview published Thursday. “A too abrupt increase in real interest rates on the back of improving global growth prospects could jeopardize the economic recovery. Therefore, we are monitoring financial market developments closely.”

Schnabel’s remarks come just days after ECB President Christine Lagarde said officials were “closely monitoring” nominal bond yields.

ECB’s Schnabel Warns Rise in Real Rates May Hurt Recovery

After injecting trillions into global markets to combat the coronavirus crisis, central bank policy makers ins major economies are now looking to push back against yields that may be rising too fast for ther economies.

The jump is driven in part by spillovers from a faster U.S. upturn and President Joe Biden’s fiscal stimulus plans.

The Bank of Korea warned it’ll intervene in the market if borrowing costs jump, Australia’s central bank has been forced to resume buying bonds to enforce its yield target and the Reserve Bank of New Zealand promised a prolonged period of stimulus even as the economic outlook there brightens.

Schnabel said she’s seeing “encouraging signs” of recovery, with vaccinations improving and the global economy rebounding faster than the ECB anticipated.

Although first-quarter gross domestic product is likely to be weaker than expected due to extended lockdowns, euro-area growth for this year as a whole should be in the “ballpark” of the ECB’s December forecast of 3.9%, she said.

Corporate debt levels are likely to be higher as a result of the crisis and insolvencies could increase when state support measures are phased out. That could spill over into the financial sector, with a rise in non-performing loans.

“Our analysis shows that euro-area banks should be able to cope with this as long as the support is not withdrawn too early and too abruptly, and as long as the overall conditions remain favorable, including the financing conditions provided by the ECB,” she said.

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