Looking to curb yield rise, ECB reaffirms easy money pledge

FRANKFURT: Two members of the European Central Bank's board pledged on Thursday to keep borrowing costs low, looking to stem a steady rise that challenges the bank's easy money policy and threatens to derail economic recovery.

Borrowing costs rose across key markets this year, partly driven by rising US Treasury yields. Verbal intervention by the ECB's Isabel Schnabel and chief economist Philip Lane indicate growing concern that market moves are becoming excessive.

"We will ensure that there is no unwarranted tightening of financing conditions," Schnabel, the head of the ECB's market operations, told Latvian news agency LETA. Lane delivered a similar message in a separate speech.

The comments had little market impact, however. Yields continued to rise, setting up a potential clash between investors and the central bank.

But unlike Lane and ECB boss Christine Lagarde, Schnabel said the focus should be on real or inflation-adjusted rates rather than nominal yields, a potentially significant difference in a world of accelerating inflation.

"A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery," she said. "Therefore, we are monitoring financial market developments closely."

Real yields have barely risen at the short end of the yield curve, but longer-term nominal yields are up sharply. Ten-year German Bunds now yield -0.257%, an almost one-year high.

While Lane singled out long-term nominal yields as key indicator to watch, he also pointed to two broader measures. Both indicate a rise in borrowing costs since the bank's December meeting that approved an extension of stimulus.

"The two key yield curves in the euro area for the funding conditions of all sectors in the economy are the overnight index swap curve - a proxy for a risk-free curve in the euro area - and the GDP-weighted sovereign bond yield curve," Lane said.

Both Schnabel and Lane added that the ECB has plenty of policy flexibility to get its desired goals, a signal that the ECB could step up stimulus without any fresh policy decision.

The ECB can still spend around 1 trillion euros on bond purchases over the next 13 months. G and given relatively modest buys in recent months, it could increase volumes without having to expand this quota.

Schnabel added that while economic growth in the first quarter could fall short of the ECB's expectation due to extended lockdowns, the full-year figure was still seen in the "same ballpark" as earlier.

"Based on our current projections, the euro area economy should be back at its pre-crisis level by mid-2022," she said.