The ECB on the alert in the face of the rise in bond rates

Objective: to reassure the markets. The European Central Bank is expected to focus Thursday on its unwavering support for monetary stimulus as recent pressure on bond rates and fears of a return to inflation have fueled doubts.

Since the start of the Covid-19 pandemic, the monetary institution has stepped up its response to help the economy and the instruments in place will, according to all expectations, be confirmed at its second meeting of the year.

But a new front has opened up for the guardians of the euro: a rise in ten-year bond rates in the United States which reflects the hope of an economic recovery but also the fear of overheating inflation. which would encourage central banks to tighten their policy.

Hence the need for the ECB to clearly reaffirm the course.

“Monetary policy is like cooking or electronic music: a good recipe, a good song, requires the right ingredients in the right proportion,” notes Frederik Ducrozet, strategist at Pictet Wealth Management.

For a year, the recipe of the Frankfurt institution has been based on the debt buyback program of its emergency program against the pandemic (PEPP), strong of 1.850 billion euros, the waves of giant loans and good market to banks and the communication on its intentions to keep key rates at their historic low.

– Envelope available –

Faced with the turmoil caused by the recent tensions on bond rates, the ECB has indicated that it does not intend to sit idly by.

A member of its board, the Italian Fabio Panetta, this week advocated a stronger monetary intervention by even drawing a parallel with a hit by the ex-electro duo Daft Punk: “Harder, better, faster, stronger” (more harder, better, faster, stronger).

Concretely, the ECB could decide on Thursday to temporarily increase the weekly pace of PEPP purchases, especially since less than half of the envelope has been committed to date.

Even if they remain at very low levels, bond interest rates in the euro zone have tightened. Since the start of the year, the yield on the 10-year bond has risen in particular 0.31% in Germany, 0.32% in France and 0.24% in Italy, notes Eric Dor, director of economic studies at IESEG School of Management.

The President of the ECB, Christine Lagarde, will be keen on Thursday to “convince market players that the ECB is firmly committed to maintaining favorable financing conditions” for the private sector, estimates the bank Unicredit.

In this regard, it could specify to what extent the indicators measuring these “financial conditions” include bond yields and bank lending rates, the monitoring of which does not formally fall within the mandate of the ECB.

Limiting the rise in bond yields is an imperative for the ECB because they “often serve as a basis for determining the rates of banks on their loans to the private sector”, whose conditions could in turn deteriorate, explains Mr. Dor.

– Revised forecasts? –

A scenario that the ECB wants to avoid at all costs so as not to see credit and investment slow down. This would jeopardize the prospect of a gradual recovery of the economy and a rise in prices converging towards the “close to 2%” objective set by the ECB.

The ECB will publish a new set of quarterly forecasts on Thursday that has traditionally served as the basis for its action.

Currently at 1.0%, the inflation forecast for 2021 should be raised, according to analysts at Capital Economics, after the rebound observed since January in the euro zone. Experts agree, however, to see it as a transitory phenomenon, linked to factors such as the increase in VAT in Germany.

As for the last growth forecast formulated in December by the bank (3.9% for 2021), it is in trouble, while the pandemic continues to wreak havoc and the vaccination campaign is advancing at slow speed.

What arouse a new call from Ms. Lagarde to governments so that they do not withdraw their generous budgetary support to economies anytime soon.

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