The European Central Bank finally made good on its promise to accelerate the pace of emergency bond purchases to counter the economic threat posed by rising yields. The ECB’s net settlement of bond purchases rose 21.1 billion euros ($25.2 billion) last week, the most since early December last year.
German government bonds were slightly higher on the day, with the yield on the 10-year bond falling one basis point to -0.31%. Italian government bond yields were steady at 0.66%, with the spread between the two hovering above this year’s lows.
Earlier in March, the ECB decided to sharply increase purchases under its emergency bond purchase program, which will continue for at least another year. Earlier, the massive U.S. fiscal stimulus plan triggered inflationary reflation bets, triggering a global bond sell-off.
ECB officials are concerned that the extended blockade and slow vaccination in Europe means it is not ready to deal with higher borrowing costs.
It comes weeks after some officials voiced their concerns, but official data showed no massive or sustained increase in purchases.
In a blog post Monday, Lagarde said the near-term outlook remains uncertain and reiterated a commitment to maintaining a favorable financing environment.
“We retain the option to adjust the pace of purchases at any Time to respond to potential changes in market conditions. While much progress has been made and we can see the light at the end of the tunnel, we cannot afford to be complacent.”
However, some ECB officials have already said that accelerating bond purchases is only a temporary move and will be reassessed in June when the latest economic forecasts are available. ECB Governing Council member Nott suggested Monday that the pace of bond purchases could be reduced in the summer if the economy develops in line with expectations.
He also said that if countries make enough progress on vaccination, they may start discussing how to ease the unprecedented monetary stimulus measures later this year. In a news conference, Nott said.
“The emergency debt purchase program will not stop as long as we remain in a blockade situation. But if we make good progress on the vaccine front, the stimulus will be reduced later this year.”
The outlook for the Dutch economy from Nott, who is also governor of the Dutch central bank, highlights the euro zone’s woes. He said the Dutch economy will likely shrink by 1 percent in the first quarter and grow by just 2.2 percent this year.
The situation in neighboring Germany is just as bad. On Monday, Germany’s central bank expects a sharp contraction in the first three months of 2021, explaining that measures to curb the Epidemic are more stringent than in the previous quarter.
This comes after German Chancellor Angela Merkel proposed to keep the restrictions in place for another four weeks. According to the German weekly Der Spiegel, the German embargo will be extended until April 18.
The German government also said Monday that it will take on more than 60 billion euros more in debt than initially planned to help ease the impact of the outbreak crisis.
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