ECB will buy bonds at a faster pace to keep the recovery on track

The European Central Bank plans to pick up the pace of its bond buying in the coming months to bolster the region’s lackluster recovery from the coronavirus pandemic and counter a spike in borrowing costs.

The central bank said in a statement on Thursday that over the next three months it expects asset purchases under its €1.85 trillion ($2.2 trillion) pandemic stimulus program “to be conducted at a significantly higher pace than during the first months of this year.”

The size of the program can also be “recalibrated if required” to maintain favorable financing conditions that help “counter the negative pandemic shock to the path of inflation,” it added.

The move immediately sent yields on Germany’s benchmark 10-year bond lower, though they later regained ground. The yield on Italy’s 10-year bond also dropped before recovering slightly.

“Time will tell whether the ECB’s ‘significantly higher pace’ will be enough, given the lackluster market reaction today,” TD Securities strategists said in a note to clients.

Maintaining a healthy market

Bond yields have been moving higher in recent weeks on concerns that prices will surge once economies reopen, prompting central bankers to reassure markets that they intend to keep interest rates low and leave stimulus measures in place. Policymakers fear that a sudden rise in rates could stifle activity and spell trouble for governments that have borrowed eye-popping amounts to rescue their economies.

Thursday’s announcement could provide some reassurance.

“The central bank has just announced an increase in the pace of [quantitative easing] … in response to what is really a very small rise in bond yields,” Claus Vistesen, chief Europe economist at Pantheon Macroeconomics, said in a research note. That “tells us a lot” about the ECB’s willingness to respond to a change in conditions, he added.

Speaking to reporters, President Christine Lagarde emphasized that the central bank is closely watching inflation, but will “see through” any jump in prices due to one-off factors, such as the return of higher taxes on goods and services in Germany.

The ECB said Thursday that it expects inflation to sharply increase from 0.3% in 2020 to 1.5% in 2021. The central bank thinks inflation could creep just above its target to hit 2% in the last three months of this year, before dropping back to 1.2% in 2022.

Lagarde said the ECB has not yet factored in the consequences of President Joe Biden’s $1.9 trillion stimulus plan, which passed Congress on Wednesday. She said the legislation “will have an impact” on economic projections, but the effect shouldn’t be “overestimated.”

In an interview with CNN Business last month, Lagarde said it’s crucial that European governments maintain fiscal support of their own, and do not “brutally” withdraw job guarantees and income support prematurely.

Europe is mired in a double-dip recession, with GDP expected to contract slightly in the first quarter following months of lockdowns across large parts of the region. A sluggish vaccine rollout will also weigh on the recovery.

Still, risks surrounding the outlook for Europe are starting to look “more balanced,” Lagarde said.

“On the one hand, better prospects for global demand bolstered by the sizable fiscal stimulus and the progress in vaccination campaigns are encouraging,” she said. “On the other hand, the ongoing pandemic, including the spread of virus mutations and its implications for economic and financial conditions, continue to be a source for downside risk.”