FRANKFURT AM MAIN: The European Central Bank said Thursday it would significantly ramp up the pace of its pandemic emergency bond buys, in a bid to soothe market jitters about a rise in government borrowing costs.
The move is aimed at preventing an “undesirable” early end to cheap money when the eurozone economy still needs ample support to recover from the pandemic, ECB chief Christine Lagarde said.
Although risks to the 19-nation currency club have become “more balanced”, Lagarde said ongoing Covid shutdowns were weighing on the economy in the short term. Uncertainty also remained over the speed of vaccinations and the threats posed by virus variants, she added.
“In these conditions, preserving favourable financing conditions over the pandemic period remains essential,” Lagarde told a press conference in Frankfurt.
Global markets have been roiled recently by a rapid rise in bond yields, triggered by signs of higher inflation on the horizon.
The ECB’s 25-member governing council on Thursday decided that the pace of its purchases under the pandemic emergency bond-buying scheme known as PEPP would be “significantly higher” over the next quarter.
The 1.85 trillion euro ($2.2 trillion) scheme, set to run until March 2022, is the ECB’s main crisis-fighting tool.
Observers had predicted that the ECB would stop short of expanding or extending the scheme and would instead opt to “frontload” PEPP purchases to counter the market turmoil.
The ECB also left the rest of its ultra-loose monetary policy unchanged, which includes super cheap loans to bank and interest rates at record low and even negative levels.
Government bond yields fell on Lagarde’s comments, with the yield on Germany’s benchmark 10-year bond dropping by 2.3 basis points to minus 0.336 percent.
Lagarde, however, underlined that the bank was not in the business of managing yield movements, in an apparent attempt to ward off criticism that the ECB might be straying from its mandate.
The ECB’s mandate is to keep inflation just below 2.0 percent, a target that has been out of reach for years.
In the latest quarterly forecasts unveiled by Lagarde, the ECB sees inflation jumping to 1.5 percent this year, up from an earlier estimate of 1.0 percent.
Next year, inflation is predict to run at 1.2 percent, up from a previous forecast of 1.1 percent.
But Lagarde stressed that the increases were driven by higher energy prices and “temporary factors” such as pent-up consumer demand as virus curbs are relaxed.
“We will see through that,” she said.
For 2023, the inflation outlook remained unchanged at 1.4 percent, still far off the ECB’s goal.
Nevertheless, the ECB defied observers by slightly raising its 2021 growth forecast from 3.9 to 4.0 percent.
Lagarde also repeated her plea for governments to help reboot the economy through fiscal stimulus.
She urged EU member states to quickly implement the bloc’s planned 750-billion-euro virus recovery fund, saying it had a “key role” to play.