LONDON – The European Central Bank could change its coronavirus stimulus program, the governor of Germany’s central bank told CNBC on Wednesday, with officials watching recent increases in bond yields.
ECB members spoke of how rising yields on government bonds in the eurozone at the end of February are “undesirable and must be resisted” – stressing concern that borrowing costs for European governments could rise and risk economic recovery in the region. .
The ECB has sought to limit the costs of loans following the pandemic by implementing a government bond purchase program known as the PEPP. But recent developments in the bond market could jeopardize those efforts and lead to greater action by the Frankfurt institution.
“We have a way of reacting to this,” Bundesbank Governor Jens Weidmann told CNBC’s Annette Weisbach on Wednesday about rising bond yields.
“PEPP comes with flexibility and we can use that flexibility to react to such a situation,” he added.
Since it was first announced in March 2020, the ECB’s Emergency Procurement Program has been extended in duration and quantity. Currently, it will last until March 2022, totaling 1.85 trillion euros (2.23 trillion dollars).
However, data showed that the ECB’s debt acquisitions have declined in recent weeks. Although the central bank explained the decline in higher redemptions, analysts questioned the reasons behind the decline in net purchases.
When asked if the ECB could step up procurement again to cope with higher borrowing costs, Weidmann said: ”.
“But again, the first step is to look at the root causes and also see what effect we have on our ultimate goal, which is price stability,” he added.
The next ECB meeting is scheduled for 11 March.
President of the German Bundesbank Jens Weidmann.
Ints Kalnins | Reuters
Risks from public debt acquisitions
Weidmann has traditionally been on the crazy side of monetary policy, advocating less intervention from the central bank. At a news conference on Wednesday, Weidmann recalled the risks of large acquisitions of government debt.
“Such acquisitions are also associated with risks, especially as they can blur the line between monetary policy and fiscal policy,” he said.
“The key issue for me here is that monetary policy needs to keep a sufficient distance from government monetary funding. This includes ensuring that incentives for sound public finances are maintained,” he added.
In this context, ECB officials have suggested that they may not reach the full amount of government bond purchases. Speaking in December, ECB President Christine Lagarde said “the envelope should not be used in full”.
Future stimulus decisions are likely to depend on the evolution of the pandemic, as well as on price dynamics. The ECB’s political mandate is to keep inflation “close to but below 2%” in the medium term. January data showed that inflation rises to the highest level since the public health emergency, at 0.9%.
In addition to the pandemic, the ECB is also analyzing climate risks. The central bank is assessing how to be “effective in the fight against climate change” and this could lead to a change in some of its policies. However, recent reports have suggested that it could disappoint climate change activists by buying only bonds from so-called greener assets.
German debt rule
In his home country, politicians are divided over the future of German finances, with some wondering whether the debt brake rule should be reformed. This policy was introduced about a decade ago and limits the German government when it takes on new debts.
However, some politicians argue that in order to stimulate the post-pandemic economic recovery, Berlin will need more flexibility to spend more.
Speaking at the press conference, Weidmann said: “After the pandemic, however, it will be a matter of restoring public finances on a solid footing, as Germany will face other long-term fiscal challenges.”
He cited pensions, health care, climate protection and education as important future expenses for the German government.
However, Weidmann does not believe that fiscal consolidation should take place overnight, but rather a process that is spread “appropriately during the economic recovery”.
However, he called on all European countries, not just Germany, to restore their public finances.
“But all the member states of the monetary union, not just Germany, will have to put their budgets in order. reliably, “he said.