Week ahead: Will ECB cap the rising bond yields?

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Summary

  • The decision about rising sovereign bond yields is on the cards as the European Commercial Bank (ECB) meets on Thursday.
  • Experts said if left unchecked, it may reverse the process of economic recovery.
  • The ECB is likely to raise its inflation forecast for this year.

The European Commercial Bank (ECB) is likely to lift the bond buying volumes and use the Pandemic Emergency Purchase Programme (PEPP) if required at its next meet on Thursday, 11 March, market experts predicted.

Policymakers are at unease with the trend in rising sovereign bond yields. For instance, the Germany’s ten-year cost of borrowings has jumped 26 basis points this February, its largest hike for a month in more than three years. A similar trend has been seen across the entire Euro area. In fact, some experts feel that the rising yields have in part got spilled over from the US markets as a result of the big fiscal stimulus being pushed through by President Joe Biden.

Also Read: What’s fuelling the surge in Bond Yields?

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If it is left unattended now, these higher government borrowing costs could spill over the businesses and consumers, slowing down the process of economic revival. Experts pointed out that with the overall demand yet to recover completely, the recent jump in nominal yields was notable.

If the ECB is fully aware of the risk, it will go in for advanced PEPP purchases, nearly 1 trillion euros of which are left unused, said Carsten Brzeski, global head of macro economy, ING Research.

Also Read: German bond yields rise to five-week high

Rising yields

Media reports cited that Christine Lagarde, president, ECB, has already voiced her concern on the increasing nominal yields. The last ECB minutes had emphasised that the inflation adjusted or real yield was the main determinant of financial conditions. Both real and nominal yields have risen this year.

As the ECB is faced with the hard task of managing the fragile economic recovery, its main concern is GDP weighted sovereign yield curve along with the overnight index swap curve, said Philip Lane, chief economist of Eurozone’s Central Bank.

Finally, whatever maybe the last decision on yields, experts agreed that the central bank can’t ignore and will have to react to the unwarranted rise in bond yield values. The central banks cannot keep justifying easy policy as the recovery continues and inflation gathers momentum, they added.

Inflation forecast

On Thursday, the ECB is likely to raise its inflation forecast for 2021. It could exceed the earlier 2 per cent target in the coming months itself. At the same time, there are policymakers who have a different view. Many have said that the recent price pick up is driven by one-time reasons and could taper off soon.

Economic outlook

Policymakers broadly see the medium-term economic outlook to remain unchanged. The second half of this year will see recovery. As Europe battles the pandemic and ongoing health restrictions, the ECB is likely to stress on the downward risks in the short term.

 


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