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European Central Bank President Christine Lagarde probably could have skipped Thursday’s news conference after the Governing Council’s statement announcing a “higher pace” of bond purchases pulled key European yields lower.
Rising bond yields, in response to expectations for at least a near-term pickup in inflation, are presenting a thorny problem for global central banks. The ECB, in particular, has fretted that rising yields could tighten financial conditions, undercutting an economic recovery that has barely got under way as the eurozone struggles with a sluggish coronavirus vaccine rollout.
The ECB responded with something investors didn’t see coming, announcing after its policy meeting on Thursday that it expects purchases of bonds in the second quarter under its pandemic emergency purchase program, or PEPP, to be conducted at “a significantly higher pace than during the first months of this year.”
Investors reacted by spurring European bond prices higher, and yields lower. The yield for10-year German government bonds TMBMKDE-10Y, -0.333%, known as bunds, fell 2.9 basis points to negative 0.340%, after tumbling as low as negative 0.365%, according to Tradeweb.
The closely watched spread between the yield on the 10-year Italian government bond TMBMKIT-10Y, 0.596% over the 10-year bund narrowed 5 basis points to 94 basis points, as the yield on the 10-year Italian paper fell 8.5 basis points to around 0.60%. The Stoxx Europe 600 SXXP, +0.49% was up 0.5%, while the euro EURUSD, +0.41% rose 0.3% to $1.1963.
“Signals from key ECB officials have been mixed in recent weeks, but today’s message that the recent increase in market interest rates is ‘undesirable’, due to the risk of a ‘premature’ tightening of financial conditions suggests that the ECB is not willing to tolerate much in the way of higher yields across any maturity, at this point,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note.
Lagarde, during her news conference, insisted that the ECB wasn’t engaging in a practice known as yield curve control, in which central banks attempt to explicitly control rates of a certain maturity.
Economists argued that the ECB’s actions, however, do resemble the practice. Vistesen noted that, generally speaking, the name of the game in the eurozone is controlling the spread between sovereign bond yields and that “today’s message indicates that the ECB isn’t prepared to tolerate much slippage.”
Meanwhile, the region’s slow vaccine rollout has done little to change ECB staff economic projections, which were updated Thursday to call for gross domestic product growth of 4% in 2021, 4.1% in 2022 and 2.1% in 2023. Lagarde did say first-quarter growth was likely to be negative, while changing the ECB’s risk assessment to “more balanced,” versus the previous description of “tilted to the downside, but less pronounced.”
Inflation is likely to prove volatile in the near term, but the ECB is prepared to look through short-term fluctuations, Lagarde said. ECB staff projections were little changed from December and remain well below target, forecasting annual inflation at 1.5% in 2021, 1.2% in 2022 and 1.4% in 2023.
Carsten Brzeski, global head of macro at ING, said there were three main takeaways from the meeting:
i) the ECB will look through any temporary acceleration of inflation and expects inflation to slow down again next year; ii) the ECB will front-load asset purchases in the coming months to underline its willingness to look through higher inflation and limit further bond yield increases; iii) the change of the balance of risk for the economic outlook suggests that any increase in the total size of the asset purchases is still far out and unlikely.
Meanwhile, uncertainty remains over exactly what the ECB’s accelerated purchases will look like. News reports indicated disagreement between Governing Council members over whether recent yield increases needed to be fully unwound.
Brzeski argued that while the decision to pick up the pace of PEPP purchases took some pressure off the ECB, Lagarde’s remarks during the news conference did little to clear up confusion over what she has described as a “holistic” and “multifaceted” set of indicators used to determine financial conditions in the eurozone.
Overall, Thursday’s actions appeared to reflect a “split” Governing Council, he said.
Sunny Oh contributed to this article.
