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Eurozone governments ’borrowing costs are rising again, testing the nerves of European Central Bank policy makers to decide whether to slow down asset purchases from next month.
If the ECB reduces its final appeal for net purchases of more than 80 billion euros a month to the next governing council on June 10, it will join other central banks that have already done so in response to a better one. economic perspective, including in Canada and the United Kingdom.
If they are U.S. Federal Reserve officials discuss whether at the meeting in late April he would start talking about reducing his bond purchases.
But the recent rise in bond yields underscores that the ECB will have to be very careful as it backs down from its recovery efforts if it wants to avoid an unintended rise in financing costs for some of the bloc’s weakest economies.
Asked on Friday whether the ECB would slow down bond purchases, President Christine Lagarde said it was “too early and it is not really necessary to discuss long-term issues”.
“I have repeatedly said that politicians need to provide the right bridge during the pandemic in the recovery so that we can truly fulfill our mandate and that we will do that,” Lagard added.
Withdrawal of monetary stimuli after the crisis is an act of balancing. Do it too quickly and it can scare investors, putting recovery at risk. But it can be done slowly and the economy can heat up, making it harder to tighten politics later.
“It’s a magician’s trick,” said Paul Diggle, an economist at Aberdeen Standard Investments. “If Lagard manages communications very calmly, he may be able to prevent tapering calls and deepen sales.”
The ECB’s most conservative “hawk” council has been pushing for weeks slow down the pace the reason for bond purchases, which is justified by better growth and inflation forecasts, is likely to be reflected in the central bank’s latest forecast for next month.
However, they have more “vigilante” board members throw back, Urging the ECB to keep up the momentum, at least until the economy fully recovers from the pandemic and inflation rises steadily.
A board member said the ECB is unlikely to slow its bond buying as investors reacted excessively to fears of rising inflation, which the central bank believes will only be temporary, adding: “We don’t want to encourage this to slow down purchases with a signal.”
The ECB’s decision has been complicated by the recent fall in government bond prices. This raises the average GDP growth of the eurozone’s 10-year earnings to 0.27 per cent, the highest since June last year.
The movement has increased to some extent German borrowing costs – a benchmark in the rest of the euro area – from very low levels since the beginning of the year, as investors respond to a better view.
Germany’s 10-year yield was relatively high minus 0.12 percent on Friday. Goldman Sachsen analysts predict that the yield will be positive this year.
The ECB’s challenge will be to commit to maintaining “good financing conditions” – preventing the costs of borrowing from households, businesses and governments from overcoming economic recovery.
The ECB reacted to a recent sharp jump in eurozone bond yields earlier this year by committing to buying bonds at a “significantly higher pace” in the second quarter.
But at the time, the eurozone was still weighing heavily on measures to curb coronavirus, and the central bank saw the rise in bond yields as an unjustified issuance in the U.S., which was recovering faster as a result of a $ 1.9 billion fiscal stimulus package.
Now, investors believe it is driven by more real signs of a recovery in the European bond market. “At the beginning of the year there was enough pessimism in the eurozone’s outlook,” said Mohammed Kazmi, portfolio manager at Union Bancaire Privée. “Now that vaccination programs are accelerating, we are seeing a link to the already optimistic optimism in the US.”
Bright growth solutions blur the attractiveness of ultra-secure assets like German government bonds. Inflation expectations have also risen, both at home and abroad.
Germany’s 10-year matching rate, a measure of market-based inflation expectations, stands at 1.41 percent, down from less than 1% this year. While this is below the ECB’s target of below 2 per cent, it means that real gains – adjusted for inflation – have remained the same despite the bond market.
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Katharina Utermöhl, an economist at Allianz, said inflation expectations are higher and that the ECB is likely to “get a foot off the pedal a bit”, slowing bond purchases in the first and second quarters, which still remains a “communication challenge”.
There is a risk that the ECB could accelerate the recent rise in borrowing costs to achieve weaker and more indebted economies – the so-called periphery of the eurozone. Italy’s 10-year return on Wednesday was the highest of eight months at 1.16 percent. The additional benefit or expansion that Rome pays compared to Berlin came in January for 10-year debts.
“It’s easy for hawks to say that this is a healthy recovery from inflation expectations and that the absolute level of performance is still low,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “But when you talk about the risk of recovery, you have to look at peripheral expansions.”
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