ECB to accelerate bond buys on rates fears

FRANKFURT AM MAIN: The European Central Bank said Thursday it would significantly ramp up the pace of its pandemic emergency bond buys, in a bid to soothe market jitters about a rise in government borrowing costs.

The move over the next quarter is aimed at "preventing a tightening of financing conditions" while the eurozone economy is still fragile, the bank said in a statement after a meeting of its 25-member governing council.

The Frankfurt institution meanwhile left key interest rates unchanged.

ECB chief Christine Lagarde's press conference at 2:30 pm (1330 GMT) will be scrutinised for more clues on the ECB's assessment of current rate and inflation fears.

Global markets have been roiled recently by a rapid rise in bond yields, triggered by signs of higher inflation on the horizon.

Investors fear faster price growth could force a hike in interest rates that would make borrowing more expensive, hampering recovery in the virus-stricken eurozone.

"To avoid an unwarranted tightening of financing conditions -- in plain words: a market upset -- the ECB needs to provide clearer guidance and explain its reaction function better this Thursday," said Berenberg bank analyst Florian Hense.

The ECB last year took unprecedented action to help the 19-nation currency club weather the coronavirus shock, launching a 1.85 trillion euro ($2.2 trillion) pandemic emergency bond-buying programme (PEPP) that is set to run until March 2022.

It has also held interest rates at record lows and offered more ultra-cheap loans to banks, while continuing its pre-pandemic bond buys to the tune of 20 billion euros a month.

The measures are aimed at keeping credit flowing in the region to encourage spending and investment.

Ahead of the rate decision, observers had already expected the ECB to pick up the pace of the debt purchases rather than pile on new stimulus.

LBBW analyst Jens-Oliver Niklasch said "it will now be exciting to see how the market reacts" to the ECB's decision to ramp up its bond buying.

"It could be that some players want to test the ECB's resolve, so we will see another rise in yields," he said. "But in the end, the central bank is in the drivers' seat because it has unlimited ammunition."

European bond yields haven't seen quite the same surge as US Treasury notes, which reflects optimism about the US economy as well as anxiety about higher inflation from Washington's $1.9 trillion stimulus plan.

Nevertheless, Germany's benchmark 10-year bond yield has risen by around 0.30 percentage points since the start of the year. French and Italian bond yields are also up.

Yields are closely watched because they serve as a guide for bank lending rates.

Many curbs on public life remain in place as eurozone countries struggle to bring down coronavirus infections, while the EU's much-criticised vaccination drive lags behind countries like the United States or Britain.

The ECB's quarterly projections are expected to reflect the gloom, with observers predicting it will nudge down its 2021 growth forecast, currently at 3.9 percent.

Inflation estimates meanwhile will likely be revised upwards and perhaps even overshoot the ECB's long-out-of-reach target of "below, but close to" 2.0 percent.

Eurozone inflation ran at 0.9 percent in January and February, a significant jump after several months in negative territory as Covid lockdowns sapped consumer demand.

But upcoming price growth driven by one-off factors such as Germany's reversal of a sales tax cut or temporary mark-ups when businesses like hairdressers first reopen, "is not the inflation the ECB has been looking for", said Brzeski.

"The ECB will turn a blind eye to these developments. This is not an easy task but any premature normalising of monetary policy would risk choking off the still fragile economic recovery."

With ongoing pandemic troubles delaying the euro area rebound, analysts predict Lagarde will repeat her plea for governments to help reboot the economy through fiscal stimulus.