FRANKFURT – The European Central Bank has said it will accelerate its eurozone debt purchases following a recent rise in borrowing costs, a surprise decision that deviates from the Federal Reserve as it seeks to strengthen the region’s regional economy.
In a statement following its political meeting on Thursday, the ECB said it expects to make purchases under a $ 1.85 trillion bond-buying program, equivalent to $ 2.2 trillion, at a significant pace. higher in the next three months than at the beginning of this year. It also left key interest rates unchanged.
A sharp divergence in the short-term economic outlook between the US and the eurozone has put the ECB in a tougher place than the Fed, which recently signaled that it will not try to stop the Treasury yields from rising. A slow launch of Covid-19 vaccines on the continent has triggered a return to social restrictions that are delaying Europe’s recovery from last year’s historic recession, even as a $ 1.9 trillion fiscal stimulus appears to fuel US economic growth.
Transatlantic drift
The US economy is expected to far outperform the eurozone this year, but borrowing costs are rising on both sides of the Atlantic, a headache for the ECB.
Annual GDP, variation compared to the previous year
Meanwhile, brighter investor sentiment around the world has increased borrowing costs globally. This has created a headache for ECB officials, who are concerned that an excessive increase in the cost of financing households and businesses could undermine the region’s recovery before it begins.
At a news conference on Thursday, President Christine Lagarde said the ECB was working to counteract an undesirable increase in bond yields, partly due to higher US growth expectations
“We will take action tomorrow,” she said of the ECB’s accelerated bond purchases.
European bond yields have fallen everywhere since Thursday’s announcement. Italy’s 10-year bond yield fell to 0.577% from 0.681% on Wednesday, hitting a three-week low. Germany’s bond yield fell to 0.332%. Yields are reversed from prices.
Federal Reserve decision-makers will meet March 16-17 to consider their next move. Fed Chairman Jerome Powell made no sign last week that the central bank will try to stop a recent rise in Treasury yields, prompting it to continue to rise.
The eurozone economy is expected to grow by about 4% this year, compared to 6.5% in the US, according to the Organization for Economic Co-operation and Development. This divergence reflects a greater fiscal stimulus in the US and a faster launch of vaccines, the OECD said this week.
SHARE YOUR THOUGHTS
What is your forecast for the European economy in 2021? Join the conversation below.
While a US muscle recovery could help support European exports, it also risks spreading to higher borrowing costs in the eurozone and elsewhere as investors transfer money to US markets.
The ECB has twice expanded its so-called emergency purchasing program in recent months, most recently to € 1.85 trillion in December and has around € 1 trillion of unused purchasing power. The central bank said on Thursday that it will continue to buy bonds at least until March 2022 and is ready to change the scale of the emergency program if necessary.
Write to Tom Fairless at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8