The European Central Bank (ECB) is trying to regain control, after several weeks of continuous increases in interest rates in the euro area. A move that saw the French 10-year bond yield close to 0.30% last week, and the German bond yield approaching the symbolic threshold of 0%.
This advance was quickly analyzed as a willingness on the part of the markets to test the ECB’s design. While inflation counters appeared to be racing in Europe, and especially in Germany – where prices rose 2% year-on-year in April – will the central bank be able to continue its highly accommodative policy? In particular, the ongoing pace of asset purchases as part of the “Pandemic Emergencies” program (PEPP)?
It is not justified
The answer first came from Christine Lagarde, last Friday. Believing that inflation was not sustainable, the ECB President emphasized that it was too early to discuss a shift in monetary policy.
The message was repeated on Wednesday – two weeks before the eagerly awaited monetary policy meeting – by Fabio Panetta, a member of the central bank’s executive board. He told “Nikkei”: “The situation we are witnessing today does not justify the decrease in the pace of buying and the debate about a gradual exit from PEPP is still clearly premature,” making the latest rate hike “undesirable”.
Patience
The day before, it was François Villeroy de Gallo who stepped onto the board. During a conference, the governor of the Bank of France estimated that the European Central Bank still had “a lot of time to judge and make a decision, after its meeting in June”. “The European Central Bank is at least as accommodating as the Federal Reserve, and at least it will be patient,” he said.
The Frenchman assured that PEPP will continue at least until March 2022, and that the European Central Bank also has other tools to operate. The “quartet” that includes the “classic” asset purchase program, which can be adjusted, key rates that can go further into negative territory if needed, long-term loans to banks (TLTRO) that can be extended, and outreach.
relaxation
All of these messages seem to have passed: Wednesday, at the close, the 10-year French interest rate was hovering around 0.15%. The spread becomes worrisome, as it could indicate a fragmentation of financing conditions in the euro area, back to more reasonable levels.
