ECB Seen Stepping Up Pace of Bond-Buying to Rein In Yields
(Bloomberg) -- The European Central Bank will step up its pace of emergency asset purchases to counter rising bond yields that risk hurting growth prospects in the euro area, according to economists.
That’s the majority view in a Bloomberg survey, which also showed that more than half the respondents expect the 1.85 trillion-euro ($2.23 trillion) program to be extended beyond its current end-date of March 2022. At the same time, just one fifth expect another increase in the size of the tool, suggesting market moves so far haven’t fundamentally changed the economic outlook.
Multiple policy makers have dismissed the need for drastic action after returns on government debt started to increase last week, yet they’ve also stressed that the ECB is ready to counter any “unwarranted” gains. For now, there’s no evidence that the region’s central banks have accelerated purchases. The Governing Council holds its next meeting on March 11.
“The ECB will express its discomfort with rising bond yields and underline its willingness to use all available instruments,” said Kristian Toedtmann, an economist at DekaBank. “But it probably won’t be specific.”
When the ECB expanded its pandemic program in December, officials pledged to preserve “favorable financing conditions.” That concept has kept many observers guessing about which gauges the ECB is watching and whether the recent rise in nominal bond yields poses a concern.
President Christine Lagarde may offer some insight next week, after asking staff in January to study different ways of analyzing borrowing costs. Nearly two thirds of economists who responded to the question say the ECB’s answer to higher yields would be faster purchases, with some predicting the central bank would try verbal interventions first.
What Bloomberg Economics Says...
“Talking down yields might not be enough this time, and the ECB may need to increase net purchases under its PEPP program. It makes sense to back words with actions.”
-Maeva Cousin, David Powell and Jamie Rush. Read the ECB PREVIEW
Roughly 40% of respondents each see the ECB spending the full amount allocated to the program, or stopping buying before reaching the cap. The median estimate among the latter for overall purchases was 1.6 trillion euros.
Most of those predicting an extension expect it to be for three months. Without an increase in the program, that would only allow for weekly net purchases of less than 15 billion euros, compared with an average of 18 billion euros so far.
The global bond sell-off matters for the euro area because sovereign yields are used by banks as a reference point for lending. The region’s recovery is already expected to be slower than that of many other advanced economies amid stubbornly high rates of infections and slow vaccine roll-outs that forced longer and in some places even harder lockdowns.
Crucial for the ECB’s decision next week will be updated economic forecasts. Respondents are split over whether growth this year will be stronger, weaker or in line with previous expectations, with pessimists being slightly in the lead.
A majority sees consumer prices rising at a faster-than-anticipated pace in 2021 and 2022.
Officials have cautioned against reading too much into inflation rates until temporary factors such as sales-tax changes and statistical adjustments to the index wash out. Governing Council member Jens Weidmann said in an interview with Bloomberg Television on Wednesday that “for a more sustained push in inflation, we’d need to see corresponding movements in wages, and that’s not something that we observe at this juncture.”
When the recovery will take hold in earnest, and whether it will unleash a surge in consumption as predicted by some economists, is therefore still highly uncertain.
“The ECB will note that there are cautious signs of economic improvement,” said Joerg Angele, an economist at Bantleon Bank. “However, it will emphasize the downside risks and the consequent need to maintain an extremely expansionary monetary policy.”
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