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The ECB considers it has the resources to keep a lid on bond yields, but officials are divided on the longer-term shape of bond-buying programmes.
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The European Central Bank will seek to contain a surge in global bond yields through jawboning and speeding up bond purchases if necessary, but hawks and doves within the Governing Council are biding their time ahead of a bigger battle over the long-term future of its monetary toolkit, eurosystem sources told MNI.
Recent remarks by Executive Board members Philip Lane, Isabel Schnabel, Luis de Guindos and Fabio Panetta have made it more likely central bank governors will look favourably on deploying the EUR1.85 trillion Pandemic Emergency Purchase Programme more rapidly, one central bank official said, though adding to the overall envelope is not on the table.
"The pressure will rise to use at least to use the majority of the [PEPP envelope]," one Eurosystem official told MNI. "I think there will be growing pressure to use at least 80 to 90%. That would show they aren't complacent in their approach, but also that they aren't being irresponsible."
Increasing the amount of weekly purchases would be "easy," the official added, "and there still would be some room for manoeuvre," - the first step being to indicate a willingness to do so in official communications later this week: "They could say, okay, just to keep everybody calm we could think about a rise."
"You may have some further comment around the level of yields and the currency and we stand ready with all tools to be adjusted," confirmed a second, though a change in major policy settings would be a surprise.
In the week ending March 3, the ECB purchased a net EUR11.9 billion via the PEPP, little changed from the preceding week. The number was likely distorted by heavy redemptions of Italian bonds, and consolidated gross purchases data will be closely eyed on Tuesday.
The question of bond yields will add "flavour" to what is expected to be an otherwise humdrum Governing Council meeting on Thursday, a third official said. The ECB is not targeting a particular level of yields, the source said, echoing Lane, who said the central bank looks at the whole curve - in contrast to Panetta's call for the ECB to "broadly identify what level of nominal yields it is aiming to achieve," and to tailor its purchases to achieve that level.
"It's important that financial conditions – i.e. real rates – are not going up," said a fourth. "With some inflation we could afford slightly higher yields, but this should not be the same pace of change as in the U.S. where we have already had growth and stimulus – even accelerated stimulus. The situation is very different and markets are tending to realise that now."
Another official said recent market action may be a wake up call.
"A falling stock market at the same time that yields increase might be a warning sign of a 'more cost inflation' case (driven by current commodities sky-high prices), rather than an 'expected strong growth' case," another said. "If that is the case - a big 'if' - then the PEPP programme should be both quickly and fully implemented."
How the ECB should calibrate its tools to address the problem of below-target inflation once the Covid-19 pandemic has passed is a subject of ongoing debate among Council members, another official said, with a "strong minority view inside the current (mainstream) expansionary majority group" favouring the transfer of PEPP's flexibility, which allows it to purchase bonds with few restrictions, to the pre-Covid Public Sector Purchase Programme, or even to the broader Asset Purchase Programme.
"The intention is to keep the expansionary stance for as long as possible, at best forever," the official continued. Although similar propositions had been brought forward in many recent Governing Council meetings, the official said, the theme is set to grow in importance once the ECB approaches a discussion about the exit path from stimulus.
"Doing this or planning this would mean that the camps might become more visible, and it's not really necessary at this moment," a second source confirmed, before adding: "'Flexibility' might be a very good wording for both camps. Flexibility is a term both sides can live with."
An ECB spokesperson declined to comment on the matters in this article.