Euro Area: ECB announces front-loading of asset purchases to keep yields in check
On 11 March, the European Central Bank (ECB) announced it will front-load its emergency asset purchases in the second quarter of this year, therefore ramping up the pace compared to Q1 in order to maintain favorable financing conditions and sustain the recovery. This follows a recent spike in government bond yields due to rising economic growth and inflation expectations, especially in the U.S. Meanwhile, the ECB left rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at their respective all-time lows of 0.00%, 0.25% and -0.50%, and it kept the total amount of its stimulus measures the same.
Incoming data suggests that GDP will have contracted again in Q1, as the persistence of the pandemic and the subsequent tightening of containment measures throughout Europe have weighed on the economy, especially in the services sector. Meanwhile, inflation has accelerated in recent months, although the Bank attributes the upswing to transitory factors and higher energy prices. Risks to the short-term outlook remain tilted to the downside due to the latest coronavirus restrictions, the spread of virus mutations and the spillover on financial conditions, although the rollout of vaccines, improving global demand prospects and sizable fiscal stimulus should support the economy in the medium term. All said, the Bank expects GDP to expand 4.0% in 2021 and 4.1% in 2022.
Against this backdrop, although the Bank reiterated that “an ambitious and coordinated fiscal stance remains” to boost the recovery, it also stressed that fiscal measures must “remain temporary and targeted in nature” and once again highlighted how crucial the implementation of productivity-enhancing structural policies will be to raise potential growth and increase economic resilience.
Commenting on the latest ECB decision, Carsten Brzeski, chief Eurozone economist at ING, noted:
“This is not only the European Central Bank’s answer to higher bond yields but probably also the outcome of a controversial discussion at the ECB’s Governing Council.”