ECB increases purchasing speed to control yield curve
The European Central Bank, which did not make any changes in the total PEPP size and interest rates as expected, announced that it will increase the pace of asset purchases in the coming months in order to contain the rising bond yields that could adversely affect the economic recovery of the region.
The European Central Bank, which did not make any changes in the total PEPP size and interest rates as expected, announced that it will increase the pace of asset purchases in the coming months in order to contain the rising bond yields that could adversely affect the economic recovery of the region. According to the ECB statement; "The Governing Council expects PEPP purchases to be realized at a significantly higher pace in the next quarter than in the first months of this year" and again "The Governing Council will buy flexibly according to market conditions and to avoid tightening of financing conditions."
There is no change in the main lines of the policy, the adjustment made by the ECB indicates that the pace of recent bond purchases will increase a little more. There is no change in the final goal of the program, which is 1.85 trillion EUR in size. The bank will also continue to offer banks long-term loans. When we look at it, we see a reaction and direct approach from the ECB to the increasing European yields depending on the bond yields in the USA. In other words, it is in question that the Fed is not bothered by the yield curve as much as ECB did. We mentioned earlier that at least the bond movement in the US could have an economic basis, but there was no such economic recovery in the Eurozone.
You can see the periodic asset purchase amounts of ECB in the chart. The ECB's bond purchases in recent weeks are below the average of the program. Thus, if the bank takes action to contain yields in the near term, it will increase the pace of asset purchases. With the increasing purchases, it is expected that long-term bond yields will cool down a little and reflect the real financing conditions of the region. With the decision, the German 10-year bond yield tested a one-week low at -0.352%.
Lagarde states that the economic activity is more balanced, but also points out the downside risks. While the 2021 inflation forecast was increased from 1% in December to 1.5%, the 2022 forecast was revised from 1.1% to 1.2%. The forecast for 2023 remained stable at 1.4%. Lagarde says the 2021 and 22 revisions are largely based on temporary factors. While the 2021 GDP growth forecast was revised from 3.9% to 4%; The 2022 estimate has been reduced from 4.2% to 4.1%. 2023 growth remained at 2.1%.
It is a matter of wonder what the Fed will do at this stage, if it remains unresponsive, it is likely that it will widen the US-German bond interest spread in favor of American rates. In such a situation, as the ECB and Fed policy divergence will be reflected in the prices, it can be expected that the USD assets will become stronger. Yesterday, the interest rate in the 10-year bond auction was 1.5230%. The bid / cover ratio is the highest since June 2018, indicating a strong demand. Today, the results of 30 years bond auction will also be important. For the FOMC, there is almost a week. Unless the Fed sees the inflation pressure permanent, they may not intervene in yield curve, and we may see more increases in a short time.