FRANKFURT – The European Central Bank has said it would accelerate its purchases of eurozone debt after a recent rise in borrowing costs, a surprise decision that deviates from the Federal Reserve in trying to strengthen the eurozone economy. region.
In a statement following Thursday’s policy meeting, the ECB said it expects to make purchases under a $ 1.85 trillion bond purchase program, equivalent to $ 2.2 trillion, to a significantly higher rate over the next three months than earlier 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 noted it would not try to curb an increase in Treasury yields. A slow roll-out of vaccines against Covid-19 on the continent has led to the return of social constraints that are delaying Europe’s recovery from last year’s historic recession, even when a fiscal stimulus of 1.9 trillion dollars looks like it will turbo fuel US economic growth.
Transatlantic drift
The U.S. economy is expected to far outpace the eurozone this year, but borrowing costs are rising on both sides of the Atlantic, which is a headache for the ECB.
Annual GDP, variation with respect to the previous year
Meanwhile, brighter investor sentiment around the world has been rising global debt costs. This has created a headache for ECB officials, concerned that an excessive rise in financing costs for households and businesses could undermine the region’s recovery before it begins.
At a news conference on Thursday, President Christine Lagarde said the ECB was acting to counteract an unwanted rise in bond yields, part of which was due to higher growth expectations in the US
“We will start action tomorrow,” he said of the ECB’s accelerated bond purchases.
European bond yields fell sharply after Thursday’s announcement. Italy’s benchmark 10-year bond yield fell to 0.577%, from 0.681% on Wednesday, to its lowest level in three weeks. The yield on the German equivalent bond fell to 0.362% less. Yields are reversed to prices.
Federal Reserve policymakers will meet March 16-17 to consider their next step. Last week, Fed Chairman Jerome Powell gave no indication that the central bank was trying to curb a recent rise in Treasury yields, prompting them to rise further.
According to the Organization for Economic Co-operation and Development (ECO), the eurozone economy is expected to grow by about 4% this year compared to 6.5% in the US. This divergence reflects greater US fiscal stimulus and faster deployment of vaccines, the OECD said this week.
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While a muscular recovery in the U.S. could help support European exports, it also runs the risk of leading to higher borrowing costs in the eurozone and elsewhere, as investors shift money to U.S. markets. United States.
The ECB has twice expanded the so-called Pandemic Emergency Purchase Program in recent months, the most recent at € 1.85 trillion in December, and has around € 1 trillion in unused purchasing power. The central bank said Thursday it would continue to buy bonds at least until March 2022 and was willing to modify the scale of the emergency program if necessary.
Write to Tom Fairless at [email protected]
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