Bond purchases could be frontloaded if bonds yields spike

A woman walks past a closed cafe as Rome becomes a ‘red zone’, going into lockdown, as the country struggles to reduce the coronavirus disease (COVID-19) infections, in Rome, Italy, March 15, 2021.

Yara Nardi | Reuters

LONDON  — European Central Bank Governing Council member Klaas Knot said Thursday he doesn’t want to see a premature run-up in government bond yields and that the ECB could take action to address this if needed.

Speaking to CNBC, Knot said it would be legitimate for the ECB to frontload bond purchases as part of its emergency pandemic program if rising yields from other regions started to affect the euro zone.

“If it (rising bond yields) is due to better growth and inflation prospects then that’s entirely benign, but if it is due to spillovers coming from different regions in the world then I think it is entirely legitimate for us to temporarily frontload some of the purchases,” Knot, who is also president of the Dutch central bank, said.

“Because we don’t want the runup in bond yields to prematurely tighten our financing conditions. And with ‘prematurely,’ I mean a tightening that would precede the actually improvement growth, the actual recovery in growth and inflation in the euro area.”

His comments come after the ECB decided at its last meeting in early March to ramp up bond buying within its Pandemic Emergency Purchase Program, or PEPP. It’s not planning to expand the total size of the program, but wants to buy more within the current limits as it looks to keep borrowing costs low for euro area governments.

The decision came against a background of rising government bond yields which ECB officials were concerned could derail the economic recovery in the region.

The euro area is still waiting for coronavirus relief funds at the EU level, and many countries are grappling with a third wave of infections, as the pace of vaccinations lags other parts of the world. All of these factors pose risks to the 19 economies that share the euro.

The EU’s plan to disburse 750 billion euros ($890 billion) across the bloc suffered a new blow in March, when the German constitutional court prevented its approval, ushering in a cloud of uncertainty about when these much-needed funds will start to be disbursed across the region.

Knot told CNBC he is confident these issues will be resolved, however, and that the first funds will come through later this year.

Euro stimulus ‘unlikely’ to match the U.S.’

However, Knot said the euro area’s fiscal stimulus — a combination of EU funds and national efforts — is “unlikely to match the numbers in the U.S.”

“Clearly we cannot present such staggering numbers,” he said, but added that he thinks the euro area is more efficient than the U.S. in its use of the funds.

The ECB has forecast a 4% GDP (gross domestic product) rate for the euro area this year, after the region contracted almost 7% in 2020. The central bank sees GDP standing 2.3% above pre-crisis levels by the end of 2023.

However, these forecasts are heavily dependent on the evolution of the pandemic and on how fast euro nations vaccinate their populations. As lockdowns persist in many parts of the region, experts are wondering if governments will have to do more on the fiscal front in the coming months.

“At this moment, I do think that the response is appropriate, but if the response needs to be stepped up then I do think there is a willingness and preparedness on the side of the fiscal authorities to step up the fiscal response,” Knot, who is seen as a more hawkish members of the ECB, added. So-called hawks are usually in favor of higher interest rates.

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