The European Central Bank kept interest rates at record-low levels on Thursday and kept its enormous bond-buying program steady as it weighed up the recovery in the eurozone economy.
The ECB’s main deposit rate will stay at -0.5%, while the coronavirus bond-buying package will stay at 1.85 trillion euros ($2.23 trillion), the governing council said in a statement.
At the bank’s last meeting it pledged to step up the pace of bond purchases in response to rising bond yields.
COVID-19 battered the eurozone economy in 2020, and a resurgence of cases has led many countries to reimpose tough restrictions in 2021.
But policymakers and citizens see hope on the horizon. The European Union’s initially slow coronavirus vaccine rollout is picking up pace and the International Monetary Fund has upgraded its growth forecast for the eurozone in 2021 to 4.4%, after the economy shrank 6.6% in 2020.
The European Central Bank’s decision to hold interest rates came as no surprise to analysts.
“Vaccination numbers within the euro area are beginning to pick up pace, providing hope that economies will soon be able to start the reopening process,” Mohammed Kazmi, portfolio manager for Swiss private bank UBP, said.
He added: “We think it makes sense for investors to start preparing and positioning for the June ECB meeting, which will likely be accompanied by significant growth revisions higher and [bond] purchases for Q3 probably moving back towards a more normal pace.”
The euro was around 0.1% higher against the dollar on Thursday at $1.204, while the yield on the key German 10-year government bond had risen 0.9 basis points to -0.250%.
European Central Bank chief Christine Lagarde said on Thursday the recent rise in bond yields could have an “undesirable” impact on the economic recovery, after the ECB announced it would ramp up the speed of its asset purchases to try to calm the market.
The Eurozone’s central bank left its coronavirus bond-buying envelope at 1.85 trillion euros ($2.21 trillion) and its key interest rate at -0.5%. But it said it would “significantly” step up the pace of its purchases within the asset-buying scheme over the next three months.
Lagarde said in a press conference after the decision that the ECB was responding to a rise in “market interest rates” including bond yields, which have climbed rapidly in recent weeks and weighed on market confidence.
“If sizeable and persistent, increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy,” she said.
“This is undesirable at a time when preserving favourable financing conditions still remains necessary to reduce uncertainty and bolster confidence, thereby underpinning economic activity.”
The ECB’s increase in the rate of bond purchases aims to tackle rising market interest rates by increasing demand for securities. Bond yields move inversely to prices.
European bond yields dropped following the announcement, with the yield on the 10-year German bond falling 1.9 basis points to -0.332%. The Italian 10-year yield fell 9.4 basis points to 0.592%.
Rising bond yields have unnerved markets in recent weeks and triggered a sharp sell-off in equities, particularly tech stocks that soared when yields were low.
Stronger expectations of growth and inflation, thanks to the rollout of vaccines and fiscal stimulus, have pushed yields sharply higher. Stronger inflation erodes the return on bonds, making investors demand a higher yield.
US Federal Reserve Chair Jerome Powell has said rising bond yields are a result of a brighter economic outlook, and that the central bank plans to keep policy steady for the time being.
But policymakers in Europe have appeared more concerned, in part because the Eurozone’s recovery is expected to be more fragile than that of the United States.
“The just-released statement suggests that the ECB is trying to demonstrate its willingness to put a cap on bond yields without showing signs of panic,” Carsten Brzeski, global head of macroeconomics at Dutch bank ING, said in a note.
The European Central Bank held interest rates at their record-low level and kept bond-buying steady on Thursday, taking a breather after increasing support to the coronavirus-ravaged Eurozone economy in December.
The ECB’s governing council kept its main deposit rate at -0.5%, meaning banks are charged to keep money with the central bank, encouraging them to lend it out.
After increasing support last month, the ECB kept its key bond-buying scheme – the pandemic emergency purchase programme (PEPP) – at €1.85 trillion ($2.25 trillion).
Yet the ECB signalled on Thursday that it will not necessarily use the whole package. “If favourable 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,” its statement said.
The euro was up 0.3% against the dollar in the wake of the decision, to $1.214.
Analysts expected the ECB to hold fire at its January meeting after it ramped up its bond-buying programme by €500bn in December and pushed back the end of the PEPP until at least March 2022.
Coronavirus cases have surged across Europe since the autumn, forcing countries to lock down their economies once again. Germany on Tuesday extended its lockdown until the middle of February and introduced stricter rules.
At a press conference following the decision, ECB president Christine Lagarde said new cases and restrictions “have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year”.
Yet she said the Bank’s monetary policy is currently “very accommodative”. And she stressed there were a number of “positives” including the rollout of vaccines, the Brexit deal, and the agreement of the €750 billion EU recovery fund.
Lagarde said inflation is likely to “remain subdued” for the foreseeable future due to weak demand, low wage pressures, and the rise in the euro. Yet she said the ECB expected inflation to pick up from December’s -0.3% reading due to increases in energy prices.
The ECB boss urged Eurozone governments to keep spending to support their economies. “The situation is sufficiently uncertain that fiscal [support] needs to be continued at the national and European level,” she said.
Jai Malhi, strategist at JPMorgan Asset Management, said: “The ECB held policy steady today, hoping that its measures implemented in the December meeting alongside the EU recovery fund rollout, will be enough to support the economy until the outlook brightens.