ECB confirms interest rates to remain unchanged
As expected, the European Central Bank (ECB) confirmed on Thursday that its interest rate of 0.5% would remain unchanged.
The ECB also said it expects purchases under the pandemic emergency purchase programme (PEPP), its bond buying stimulus, would “be conducted at a significantly higher pace” over the next quarter, in an effort to contain rising bond yields.
The bond buying program has the effect of pushing down bond yields, which act as a benchmark for borrowing across the region.
The ECB also explained that it would “purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”, in a statement today.
The pound jumped up against the euro to 1.679 shortly after the news broke, while the euro fell below 1.9450 against the dollar.
German bond yields, viewed as the region’s benchmark, plunged as the news of the ECB’s bond buying broke, as did the Italian bond yields.
Christine Lagarde took centre stage in Frankfurt, Germany, as the ECB president provided reasoning behind the policy announcements, as well as an assessment of the eurozone area’s economic circumstances.
The former IMF chief warned against rising bond yields as a risk to financing conditions, and confirmed that as the cause for the ECB’s policy announcement.
Lagarde confirmed that high Covid-19 infection rates and lockdowns are continuing to hurt growth, while saying that the overall economic situation will improve.
The ECB president said the eurozone would likely contract in Q4 of 2020 and Q1 of 2021 for this reason. She also confirmed growth forecasts of 4%, 4.1% and 2.1%, for 2021, 2022 and 2023 respectively.
Commenting on the ECB’s bond purchasing program, Rupert Thompson, Chief Investment Officer at Kingswood, said:
“The European Central Bank plans to step up the pace of its bond purchases over coming months in an attempt to prevent a tightening of financing conditions on the back of the recent rise in government bond yields.”
“The move didn’t require the ECB expanding the size of its €1.85trn quantitative easing program as this runs until next March and already gives it scope to purchase another €1trn of bonds. The action occurs against the backdrop of the disappointingly slow vaccine roll-out, which is delaying the economic recovery in the Eurozone, and also the fiscal stimulus in the region being considerably smaller than that now underway in the US.”
 confirmed on Thursday that its interest rate of 0.5% would remain unchanged.){kind=link}