Christine Lagarde (R), President of the European Central Bank (ECB), and Vice-President Luis de Guindos (L)
Thomas Lohnes | Getty Images News | Getty Images
Central bank policy is largely based on signaling or verbal interventions.
The famous comment by former European Central Bank President Mario Draghi, “everything you need” is the perfect example.
But only words can also fail to provide a proper result.
In recent weeks, ECB officials have expressed their vocation to describe the increase in bond yields as an “unjustified tightening” or “a situation that we need to monitor closely.”
There is no unanimity in the Governing Council of the ECB on whether financing conditions run the risk of turning south with the sharp rise in yields. And market participants would like to better understand the ECB’s possible responses to this, and the central bank will meet this week.
In recent weeks, yields on fixed-income assets (especially U.S. treasuries) have risen due to the belief that inflation will rise after the coronavirus pandemic and lead to a tightening of monetary conditions. Higher yields mean that borrowing governments face higher costs in managing their debts, but it also means a fall in stock markets and large companies also have to spend more on their debt obligations. debt.
“We believe recent market movements are putting this framework on its first significant test,” said Spyros Andreopoulos, senior European economist at BNP Paribas.
“First, the ECB must decide whether (and how) it intervenes given significant increases in yields … Second, the ECB must decide whether it makes the notion of financing conditions more specific than hitherto.”
When the eurozone central bank decided to add “maintain favorable financing conditions” to its targets in December, it was not clear what that meant. Within the Governing Council there was a divergence in the interpretation of the term, according to sources close to those responsible for decision-making.
Recent data on inflation in the region have been better than expected, as energy prices are driving up increases. But also throughout the year, there is a clear reflectionist momentum due to the reopening of economies after the Covid-19 closures.
“In recent speeches, ECB officials did not really address the latest rise in inflation rates and were rather silent on the ECB’s inflation forecasts,” said Carsten Brzeski, global head of macro, and ING Research.
“In our view, overall inflation could exceed 2% during the second half of the year and we are very curious if the ECB shares this view.”
Meanwhile, data released on Monday showed that ECB bond holdings in its pandemic stimulus program only rose by 11.9 billion euros ($ 14.1 billion) the week to March 3, below the 12 billion euros from the previous week and below 18.1 billion euros. average since the program began. This effectively means that its bond buying is slowing down a bit and that it is putting upward pressure on debt yields in the region. Yields are inversely related to the price of the bond.
The sale of the debt obviously did not cause the ECB to increase purchases and it is unclear whether the central bank decided to ignore the increase in yields or whether it expected the Governing Council to meet to find a common approach. We hope the market finds the answer at Thursday’s meeting.