Christine Lagarde (R), President of the European Central Bank (ECB), and Deputy Representative Luis de Guindos (L)
Thomas Lohnes | Getty Images News | Getty Images
Central bank policy is largely based on tokens, or verbal interventions.
The famous quote “whatever it takes” from former European Central Bank President Mario Draghi is a good example.
But words alone can fail to provide a suitable result.
In the last few weeks, ECB officials have been vocal in calling for an increase in the yield of “pointless tightening” bonds or “a situation that we need to keep a close eye on. ”
There is no unanimity in the ECB’s Governing Council as to whether funding conditions are in danger of turning south with the strong rise in output. And market participants would like a better understanding of the ECB’s possible responses in this regard, with the central bank to meet this week.
In the last few weeks, yields on fixed-income funds (particularly US Treasurys) have gone up due to the belief that inflation will pick up after a coronavirus outbreak and lead to tightening in money situations. Higher yields mean that borrowing governments have higher costs in servicing their debt, but it also destroys stock markets with large companies also costing more than they can afford. their debt obligations.
“We believe that recent market trends add that framework to its first major test,” said Spyros Andreopoulos, senior European economist at BNP Paribas.
“First, the ECB must decide whether – and how – to intervene in a significant increase in yield … Second, the ECB must decide whether the in terms of making funding conditions more specific than it has been to date. ”
When the eurozone central bank decided to “maintain a favorable financing position” to its targets back in December, there was no clear understanding of what that meant. Within the Governing Council there were differences in the definition of the term, according to sources close to the decision makers.
Recent inflation data in the sector has been better than expected with energy prices driving the rises. But also for the full year, there is a clear reversal push as a result of the reopening of the economies following the Covid-19 lockout.
“In recent speeches, ECB officials did not really address the latest rise in inflation rates and were relatively silent about the ECB’s inflation forecast,” said Carsten Brzeski, global macro leader, at ING Research.
“In our view, headline inflation could rise by more than 2% in the second half of the year and we are very curious whether the ECB shares this view.”
Meanwhile, data released Monday showed that ECB bond holdings in its pandemic stimulus program increased by only 11.9 billion euros ($ 14.1 billion) in the week to March 3, down from 12 billion euros a week earlier that and less than the average 18.1 billion euros since the program began. This effectively means bond purchases are slowing down a bit, putting a higher pressure on debt production in the sector. Yield with bond price has an unstable relationship.
It is clear that the sale of debt did not prompt the ECB to increase purchases, and it is not clear whether the central bank decided to ignore the increase in yield or whether it was waiting for the Council. Management to come together to find a common approach. Hopefully the market will get the answer at the meeting on Thursday.