European Central Bank President Christine Lagarde.
Handout | Getty Images News | Getty Images
LONDON — The European Central Bank opted to keep interest rates unchanged on Thursday, as investors watch closely for clues on what it might do about rising bond yields.
Bond yields in the euro zone have been rising since February, following their United States counterparts higher after President Joe Biden announced a massive fiscal stimulus plan.
There are fears that rising yields could derail the economic recovery in Europe by raising borrowing costs for countries already struggling with the crisis that unfolded from the coronavirus pandemic. Bond yields move inversely to prices.
The ECB also decided Thursday to leave its Pandemic Emergency Purchase Program, or PEPP, at its current level. The scheme was introduced in March 2020 in the wake of the pandemic and is currently scheduled to last until March 2022, totaling 1.85 trillion euros ($2.21 trillion). ECB member, Jens Weidmann, told CNBC earlier this month that changes to this government bond-buying program could be implemented in an effort to calm bond markets.
However, this is a tricky issue for the central bank, which cannot be seen to act directly to address bond yields as this isn’t part of its mandate. Any such moves could spark criticism that it is protecting euro zone governments from market dynamics, and raise expectations that it could always act when yields rise.
Economic outlook
Back in December, the ECB forecast that gross domestic product (GDP) in the euro zone would rise by 3.9% this year and 4.2% in 2022. The ECB is due to unveil fresh estimates on Thursday.
But some EU countries remain in lockdown and others have tough social restrictions in place. In addition, the rollout of Covid vaccines has been slow in the region. This could add further pressure on the 19 euro zone economies, and hinder their economic recoveries.
The ECB has called on the various governments to step up their fiscal responses, arguing that the burden cannot lie solely on the shoulders of the central bank. The European Union agreed to an unprecedented level of fiscal stimulus last year, but these funds are only due to be disbursed from this summer onward.
“A bigger fiscal stimulus can contribute to higher business confidence, raise capital formation, boost employment, lift inflation (expectations), and, if central banks contain the rise in nominal yields, lower real rates can further support growth,” Florian Hense, economist at Berenberg, said on Tuesday in a note.
