By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank is likely to signal faster money printing on Thursday to keep a lid on borrowing costs but it will stop short of adding firepower to its already aggressive pandemic-fighting package.
Concerned that a steady rise in borrowing costs could derail the bloc’s recovery from a pandemic-fuelled recession, ECB policymakers meeting on Thursday will be keen to calm markets and recommit to rock-bottom rates until well into the recovery.
But converting that commitment into specific policy action will be a delicate balancing act.
The ECB cannot appear to micro-manage bond yields since that would tie its hands in the future and invite accusations it is shielding governments from market forces.
The euro zone’s central bank will also be keen not to overstate the rise in yields, which are still low by most standards, with the German yield curve, the benchmark for the 19-country bloc, still in negative territory up to 20 years.
Having already committed to “maintaining favourable financing conditions”, however, it cannot ignore the rise in borrowing costs, which has not been matched by improving economic prospects and mostly mirrors a move in U.S. Treasuries.
Policymakers have already approved all the firepower needed to combat the rise in yields, so technically no decision is required. The ECB still has a 1 trillion euro quota to buy bonds through next March, with flexibility to tailor volumes to market conditions.
But markets are now doubting the ECB’s commitment: purchase volumes have actually decreased in the past two weeks, confounding expectations it will use its much-emphasised “flexibility” to run up its bond-buying in line with a string of verbal warning from policymakers.
So Thursday’s decision will be more a communications exercise, with policymakers seeking to convince investors that the flexibility is real and useable, even if not mechanically with set targets.
“At a minimum, the ECB would want to forestall a further increase in yields from current levels and would probably prefer to engineer a decline,” BNP Paribas said.
“We would expect a reference to increased pace but not a firm commitment to buy certain amounts per unit of time.”
WEAK GROWTH
Disagreements among policymakers could also complicate the exercise. While some rate-setters are already demanding action, conservative policymakers argue that the yield rise has been small and at least partly justified by the brightening outlook.
Indeed, global inflation is rising and COVID-19 vaccines are being rolled out, lifting hopes for the end of lockdowns.
But Europe appears to be a laggard in the recovery, making comparisons with the United States or the Britain seem less valid.
For one, the rise in inflation is temporary, boosted by a string of one-off factors including a German tax hike, statistical changes and the rebound in oil prices.
Inflation is then seen sinking back well below the ECB’s nearly 2 percent target and new staff projections to be unveiled on Thursday are likely to show price growth in 2023 still around the 1.4% level the ECB predicted three months ago.
Growth is also weaker than forecast with a new wave of the coronavirus pandemic requiring longer lockdowns and challenging expectations for a rapid rebound this spring.
Unlike in the United States, fiscal stimulus will be modest at best, so economies will require longer central bank stimulus.
“The margin for communication error is shrinking; markets are aware that the ECB does not want to be perceived as controlling yield curves, but statements that are too generic or half-hearted are likely to be badly received,” UniCredit economist Marco Valli said.
The ECB announces its policy decision at 1245 GMT, followed by ECB President Christine Lagarde’s 1330 GMT news conference.
With Thursday’s decision, the ECB’s key rate is expected to stay at a record low -0.5% while the total envelope for the Pandemic Emergency Purchase Programme is also seen unchanged at 1.85 trillion euros.
(Editing by Catherine Evans)
