ECB ACCELERATES BOND-BUYING IN THE NEXT QUARTER

The ECB is speeding up the pace of its pandemic bond-buying program to curb rising bond yields that threaten the region's economic recovery.

The ECB will continue making net purchases of assets by the Pandemic Emergency Purchasing Program (PEPP) with a total package of 1.85 trillion euros. The Governing Council will terminate net asset purchases under the PEPP once it judges that the COVID-19 crisis phase is over, but in any case not before the end of March 2022.

Based on an assessment of financing conditions and inflation prospects, the Governing Council expects PEPP purchases to reach a significantly higher pace in the upcoming quarter compared to the first months of the year.

The ECB will purchase flexibly following the market conditions without tightening the financing conditions.

If favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.

The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023.

Second, net purchases under the asset purchase program (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25%, and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

Finally, the Governing Council will continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Eurozone bond yields fell in response to the decision.

The PEPP scheme was introduced in March 2020 following the pandemic and is expected to last until March 2022. It is worth a total of 1.85 trillion euros. ECB member Jens Weidman told CNBC earlier this month that changes to the government bond-buying program could be imposed in a bid to calm bond markets.

Eurozone bond yields have been rising since February. U.S. stock yields also rose after President Joe Biden announced a major fiscal stimulus plan.

Some express concerns that rising profitability could change Europe's economic recovery by raising borrowing costs for countries affected by the coronavirus crisis.

However, this is a difficult issue for the central bank, which is not authorized to act directly with bond yields. Any related actions could cause criticism that the ECB is influencing eurozone governments from market dynamics and raise expectations that it can always act when profitability rises.

Economic prospects

As early as December, the ECB forecasts that the gross domestic product (GDP) in the euro area will grow by 3.9% this year and by 4.2% in 2022. The ECB must disclose its updated forecasts after today's meeting.

But many EU countries remain blocked, while others have imposed severe social restrictions. The spread of Covid vaccines is still slow in the region. This could add additional pressure on the 19 economies and hamper their economic recovery.

The ECB has called on various governments to step up their fiscal responses, arguing that the burden cannot rest solely on the shoulders of the central bank. The European Union agreed on unprecedented aid last year, but these funds are due to be enforced this summer.