Lagarde said on Thursday the central bank expected that a significantly higher pace of bond purchases in the upcoming quarter than was seen during the first months of the year. And at a press conference held following the ECB’s monetary policy meeting, she highlighted the importance of countering too big a rise in government bond yields, which act as the benchmark for calculating costs for the whole economy. That begged the question why the central bank had not already acted. After all, the return on 10-year German government bonds rose from 0.58% at the end of the year into some one-year high of minus 0.203 per cent towards the end of February.
For a few eurozone rate-setters, that’s a welcome change from her predecessor Mario Draghi’s potential for springing surprises. However, the time it’s accepted the central bank to announce it will step up the pace of its asset purchases in reaction to increasing bond yields suggests there are also downsides to this intuition.
Granted, as Lagarde pointed out on Thursday, monetary policymakers were meeting on a daily basis about a year ago through the pandemic-driven turmoil. But occasionally, an agreement might not be so easy to hammer out and bond transfers could become unruly while policymakers try to achieve consensus. The growth in purchases announced on Thursday will probably be enough to keep a lid on returns for now. However, since the recovery gathers pace, fast-moving markets are more likely to examine Lagarde’s desire, and power, to keep everybody happy.
“We will 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,” Lagarde said.
One reason may be the divergence of views within the ECB. Those concerned about the fragility of the economic recovery want to do more. Their hawkish counterparts have seemed relaxed about a rise in yields that is a result of greater growth prospects. Ensuring both camps are on board prior to acting fits with the way Lagarde operates. The problem is that it requires some time to forge consensus in the ECB’s governing council.
“The Governing Council will 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,” the ECB added in its statement.