More bond purchases in the second quarter
The ECB wants to increase the pace of its bond purchases in order to curb the recent rise in government bond yields from euro countries. The volume of purchases, however, remains unchanged.
Dhe European Central Bank (ECB) is keeping all measures open in the corona pandemic. Initially, both the billion dollar emergency purchase program for bonds and interest rates will remain unchanged, as the ECB Council decided on Thursday in Frankfurt. Economists hadn’t anticipated a change in monetary policy at the time, although higher bond yields were a cause for concern.
However, the monetary authorities want to significantly accelerate bond purchases in the second quarter. ECB President Christine Lagarde recently emphasized that Europe’s monetary watchdog would keep financing conditions favorable during the pandemic. The central bank is therefore closely monitoring the development of long-term bond yields. These had risen as some investors expect inflation to rise in the face of multi-billion dollar economic stimulus programs from governments and the flood of money from central banks during the pandemic.
As in January, the annual inflation rate in the euro area was 0.9 percent in February. In December consumer prices were still 0.3 percent lower than in the same month last year. Whether the jump at the beginning of the year indicates a permanent rise in inflation is controversial. The ECB is aiming for a rate of just under 2 percent in the medium term. This goal has not been achieved for years.
In terms of interest rates, the rate also remained unchanged: the key interest rate in the euro area was kept at a record low of zero percent. Commercial banks still have to pay 0.5 percent interest when they park money at the central bank. Exemptions for certain sums are intended to relieve the institutes of the costs.
It was only in mid-December that the monetary authorities increased their particularly flexible Corona emergency purchase program for government bonds and company securities (Pandemic Emergency Purchase Program / PEPP) by EUR 500 billion to EUR 1.85 trillion. The minimum duration of the program was then extended to the end of March 2022.
The purchases help states and companies alike: they do not have to offer such high interest rates for their securities if a central bank is a big buyer in the market. This is particularly important for states because during the Corona crisis they launched rescue programs worth billions that need to be financed.
Government bond yields fall briefly
“It is good that the pigeons have not yet fully asserted themselves in the ECB Council this time and that the Council did not prematurely decide to raise the PEPP ceiling again,” says Friedrich Heinemann, ZEW economist. “It would be completely exaggerated to dramatize the rise in bond yields since the beginning of the year.” You also have to look at the level: Even the Greek 10-year interest rates are currently below 1 percent. In real terms, the yields on all euro government bonds are negative.
Ulrich Wortberg from Helaba believes that the ECB has not fundamentally changed its monetary policy. “The very expansive orientation remains. With the rise in yields and inflation expectations, however, there is a certain pressure to act and so she emphasized the flexibility of the pandemic emergency program and decided to temporarily increase purchases under this program. “
European government bond yields came after the decision, particularly Italian government bonds. The yield on ten-year Bunds fell from minus 0.33 to minus 0.37 percent, but then quickly rose again to 0.34 percent. Italian government bonds with a term of ten years were last with a yield of 0.59 percent after 0.65 percent in the run-up to the decision. The euro, which had already appreciated slightly in the morning, fell slightly.