The ECB will speed up bond purchases to prop up the sluggish economy –

The ECB will speed up bond purchases to prop up the sluggish economy

FRANKFURT – The European Central Bank said it would accelerate its purchases of eurozone debt after a recent rise in borrowing costs, a surprising move that differs from the Federal Reserve in its attempt to prop up the region’s ailing economy.

In a statement after its monetary policy meeting on Thursday, the ECB said it expects to make purchases under a 1.85 trillion euro bond purchase program, equivalent to $ 2.2 trillion, at a significantly higher rate. over the next three months than at the beginning of this year. It also left its key interest rates unchanged.

A sharp divergence in the short-term economic outlook between the US and the eurozone has put the ECB in a tougher position than the Fed, which recently signaled that it would not seek to stem a rise in Treasury yields. A slow rollout of Covid-19 vaccines on the continent has prompted the return of social constraints that are delaying Europe’s recovery from last year’s historic recession, even as a $ 1.9 trillion fiscal stimulus appears to boost US economic growth

Transatlantic drift

The US economy is expected to outperform the eurozone by far this year, but borrowing costs are rising on both sides of the Atlantic, a headache for the ECB.

Annual GDP, variation with respect to the previous year

Meanwhile, the optimism of investor sentiment around the world has driven up borrowing costs globally. That has created a headache for ECB officials, who worry that a steep rise in financing costs for households and businesses could undermine the region’s recovery before it begins.

At a press conference Thursday, President Christine Lagarde said the ECB was acting to counter an undesirable rise in bond yields, part of which was due to higher growth expectations in the US.

“We are moving into action as early as tomorrow,” he said of the ECB’s accelerated bond purchases.

European bond yields fell across the board after Thursday’s announcement. The yield on Italy’s 10-year benchmark bonds fell to 0.577% from 0.681% on Wednesday, hitting the lowest level in three weeks. The yield on the German equivalent bond fell to minus 0.362%. Returns move inversely to prices.

Policymakers at the Federal Reserve will meet March 16-17 to consider their next move. Last week, Fed Chairman Jerome Powell gave no sign that the central bank would try to stop a recent surge in Treasury yields, leading them to rise even higher.

The eurozone economy is expected to grow around 4% this year compared to 6.5% in the United States, according to the Organization for Economic Cooperation and Development. That divergence reflects greater fiscal stimulus from the United States and faster vaccine deployment, the OECD said this week.


What is your forecast for the European economy in 2021? Join the conversation below.

While a strong US recovery could help support European exports, it also risks spilling over to higher borrowing costs in the eurozone and elsewhere as investors transfer money to US markets. .

The ECB has twice expanded the so-called Pandemic Emergency Purchase Program in recent months, most recently to € 1.85 trillion in December, and has around € 1 trillion of unused purchasing power. The central bank said Thursday that it would continue to buy bonds until at least March 2022 and that it was ready to alter the scale of the emergency program if necessary.

Write to Tom Fairless at [email protected]

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