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Business & Finance

ECB should explore yield curve control, de Cos says

  • "I think yield curve control is an option worth exploring," de Cos said in an interview in Central Banking.
  • An alternative the ECB could consider is targeting the risk-free yield curve, for example the overnight index swap curve.
04 Jan 2021

MADRID: The European Central Bank should explore the option of moving to yield curve control to raise inflation as such a policy could even reduce the volume of bond purchases, ECB Governing Council member Pablo Hernandez de Cos said.

The Bank of Japan and the Reserve Bank of Australia are both capping government bond yields to keep borrowing costs stable but critics see the policy as risky since central banks essentially pledge to buy unlimited quantities of bonds to ensure certain yield levels.

"I think yield curve control is an option worth exploring," de Cos said in an interview in Central Banking. "The experience of these central banks suggests that, if sufficiently credible, yield curve control allows the central bank to achieve a yield curve configuration with a lower amount of actual purchases, hence enhancing efficiency."

In December, the ECB rolled out more stimulus measures - spearheaded by a 500 billion euro, nine-month expansion of its emergency bond purchases scheme, now worth 1.85 trillion euros, to lift the currency bloc out of a double-dip recession.

But De Cos, Spain's central bank chief, said that the implementation of yield curve control would be more complex in the euro zone since the ECB would need to target 19 sovereign yield curves.

An alternative the ECB could consider is targeting the risk-free yield curve, for example the overnight index swap curve, coupling it with a flexible use of the ECB's asset purchase programme.

"This strategy would probably deliver similar outcomes. However, it's not something we have discussed yet," De Cos said.

Regarding the inflation target, which is part of the ECB's ongoing policy review, De Cos said that if the price growth had been below target for a while in the euro zone, "you should also accept inflation outcomes that are above the target for some time".

"We need it to be higher than the current number, if only marginally higher, meaning for example 2%," De Cos said.

The ECB's current definition of price of stability is below, but close to, 2%.