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By Luke Heighton
FRANKFURT (MNI) - Longer-term sovereign yields have become "virtually
unresponsive" to short-term interest rate cuts, European Central Bank chief
economist Philip Lane said Wednesday, making asset purchases a more effective
tool under the stressed market conditions caused by the Covid-19 crisis.
"While we stand ready to cut policy rates in the future as market
conditions normalise and if warranted by the medium-term inflation outlook, this
evidence tilts the balance towards asset purchases as the more efficient tool in
current circumstances," Lane told a Financial Center Breakfast Webinar.
Lane cautioned against placing too much confidence in recent data
suggesting a swift economic rebound as Europe slowly emerges from lockdown,
since the scale of the contraction had been "so large that overall activity will
remain far below the pre-crisis level and the scale of the initial rebound in
these weeks will not necessarily be a good guide to the speed and robustness of
It may also take time to convince households and firms that the pandemic is
sufficiently under control and to restore economic confidence, he said.
By the end of Q2 2021, Lane said, the ECB's total asset purchasing and
reinvestment policies are expected to have led to the withdrawal of substantial
duration risk from the market, in the order of 27% of the duration-equivalent
stock of outstanding public debt in the four largest euro area economies. This
would represent an increase of 8% from the end of 2019, he explained, once the
supply of bonds anticipated in the latest Eurosystem staff macroeconomic
projections is taken into account.
The Pandemic Emergency Purchasing Programme and the expansion of the ECB's
original asset purchase programme should reduce the ten-year sovereign term
premium by almost 45 basis points, he added, complementing the "nearly 100 basis
point compression attributable to the stock of assets purchased under the APP in
recent years and the September 2019 recalibration of the APP."
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