LONDON – The European Central Bank could change its coronavirus-related stimulus program, the German central bank governor told CNBC on Wednesday, with officials wary of recent increases in bond yields.
ECB members have spoken of how the rise in yields on government bonds in the euro area in late February is “unpleasant and must be resisted”, highlighting concerns that lending costs for European governments they could increase and risk economic recovery in the region.
The ECB has tried to contain the costs of debt in the wake of the pandemic, with the implementation of a public bond purchase program, known as PEPP. But recent bond market movements could jeopardize these efforts and lead to further action by the Frankfurt-based institution.
“We have ways to react to that,” Bundesbank Governor Jens Weidmann told CNBC’s Annette Weisbach on Wednesday about rising bond yields.
“PEPP includes flexibility and we can use that flexibility to react to a situation like this,” he added.
Since it was first announced in March 2020, the ECB’s pandemic emergency procurement program has expanded in duration and quantity. It is currently expected to last until March 2022, with a total of € 1.85 trillion ($ 2.23 trillion).
However, data has shown that purchases of ECB debt have fallen in recent weeks. While the central bank has explained the fall in higher depreciation, analysts have questioned the reasons for the decline in net purchases.
When asked if the ECB could increase purchases again to meet higher debt costs, Weidmann said: “Of course, this is an item on the table, to use the flexibility we have at the time. to implement the PEPP “.
“But again, the first step is to analyze the root causes and also see what effect we have on our ultimate goal, which is price stability,” he added.
The next ECB meeting is scheduled for 11 March.
The president of the German Bundesbank, Jens Weidmann.
Ints Kalnins | Reuters
Risks arising from the purchase of public debt
Weidmann has traditionally been on the hawkish side of monetary policy, advocating less central bank intervention. At a news conference Wednesday, Weidmann recalled the risks of large government debt purchases.
“However, these purchases are also associated with risks, mainly because they can blur the line between monetary and fiscal policy,” he said.
“The key issue for me here is that monetary policy must keep a sufficient distance from government monetary funding. This includes ensuring that incentives for sound public finances are maintained,” he added.
In this context, ECB officials have suggested that it may not reach the total amount of public bond purchases. Speaking in December, ECB President Christine Lagarde said “there is no need to use the envelope in its entirety”.
Future stimulus decisions are likely to depend on the evolution of the pandemic and price dynamics. The ECB’s political mandate is to keep inflation “close to but below 2%” in the medium term. January data showed that inflation had risen to its highest level since the public health emergency arrived, to 0.9%.
In addition to the pandemic, the ECB is also studying climate risks. The central bank is assessing how to be “effective in the fight against climate change” and this could lead to a change in some of its policies. However, recent reports have suggested that it could disappoint climate change advocates by buying only bonds from so-called greener assets.
German debt rule
In their home country, politicians are divided over the future of German finances, and some are questioning whether the debt brake rule should be reformed. This policy was introduced about a decade ago and limits the German government in taking on new debts.
However, some politicians argue that to drive the post-pandemic economic recovery, Berlin will need more flexibility to spend more.
At the press conference, Weidmann said: “After the pandemic, however, it will be a matter of returning public finances to a solid level, as Germany will face long-term fiscal challenges.”
He cited pensions, health care, climate protection and education as important next expenses for the German government.
However, Weidmann does not believe that fiscal consolidation should take place overnight, but rather a process that is distributed “adequately to economic recovery”.
However, he called on all European countries, not just Germany, to restore their public finances.
“But all the member states of the monetary union, not just Germany, will have to sort out their budgets after the crisis. In the euro area, it is especially the very high debt ratios, in some cases that ‘they have to reduce reliably,’ he said.