FRANKFURT: The European Central Bank is on Thursday expected to stress its commitment to keeping borrowing costs low, as inflation concerns and a slow vaccination drive weigh on the eurozone economy. This week's meeting of the ECB's 25-member governing council is likely to be dominated by a recent rise in global 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 and slow the recovery from the pandemic. "ECB President Christine Lagarde will have to convince markets that the central bank remains strongly committed to securing favorable financing conditions," Unicredit bank said in an analyst note.
The Frankfurt institution is also expected to nudge down its 2021 forecast for economic growth in Thursday's latest quarterly projections. Many curbs on public life remain in place as the euro area struggles to bring down coronavirus infections, while the pace of vaccinations lags behind countries like the United States or Britain.
To boost growth and drive up anemic inflation, the ECB has long held interest rates at historically low and even negative levels, alongside offering ultra-cheap loans to banks. It responded to the coronavirus shock by launching a 1.85 trillion euro ($2.2 trillion) pandemic emergency bond-buying program (PEPP), on top of an existing asset purchasing scheme running at 20 billion euros a month. The massive debt purchases are aimed at keeping credit flowing in the 19-nation currency club to encourage spending and investment.
Talk over action
"With no prospect of any change to its policy settings, the focus will be on the bank's efforts to explain how and when it would step up bond purchases in response to rising bond yields," said Andrew Kenningham, an economist at Capital Economics. Some observers expect the ECB to step up the pace of PEPP purchases or extend the scheme beyond March 2022, while others think the bank might settle for saying it is "monitoring" the yield situation.
European bond yields haven't seen quite the same surge as US Treasury notes, which reflects optimism about the US economy as well as jitters over higher inflation from Washington's $1.9 trillion stimulus plan. Nevertheless, Germany's benchmark 10-year bond yield has risen by 0.31 percent since the start of the year. French 10-year bond yields have climbed 0.32 percent and Italy's by 0.24 percent, said Eric Dor of France's IESEG business school. Yields are closely watched because they serve as a guide for bank lending rates, and the ECB is eager to avoid a premature end to easy money before the Covid recovery has taken hold.
'Blind eye'
The ECB has repeatedly stressed it plans to stick to its ultra-loose monetary policy for "as long as necessary" and use "all of its instruments" to reach its inflation goal of just under 2.0 percent. Eurozone inflation stood at 0.9 percent in January and February, a big jump after several months of negative inflation last year as COVID shutdowns sapped consumer demand. A series of one-off effects is expected to see consumer prices climb further this year and perhaps even overshoot the target, complicating the ECB's job.
Price growth driven by Germany's reversal of a sales tax cut or temporary mark-ups when businesses like hairdressers first reopen do not represent the inflation the ECB wants, said ING bank economists. "The ECB will turn a blind eye to these developments. This is not an easy task but any premature normalizing of monetary policy would risk choking off the still fragile economic recovery," they wrote.
The ECB's last projections put inflation at 1.0 percent for 2021 and economic growth at 3.9 percent. With pandemic troubles widely expected to delay the euro area rebound, Lagarde is poised to repeat her plea for governments to help reboot the region's economy through higher spending. - AFP