ECB ramps up debt buying to contain rising bond yields

Frankfurt

THE European Central Bank pledged to ramp up buying government debt in coming months in a bid to a contain rising bond yields that threaten to derail the region's economic recovery.

Policy makers expect purchases in the next quarter "to be conducted at a significantly higher pace than during the first months of this year," according to a statement on Thursday. They kept the overall size of the 1.85 trillion-euro (S$2.97 trillion) pandemic bond-buying programme unchanged.

The enhanced spending commitment was added after a jump in global government bond yields driven partly by the speedy US economic recovery from the pandemic, which has boosted inflation expectations. That's a risk to the eurozone, as those yields are used as a reference for the cost of bank loans to companies and households.

"Increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy," president Christine Lagarde told reporters during an online press conference. "This is undesirable."

"The ECB has taken action to address rising bond yields, saying asset purchases will be stepped up in the near term. That's a relief after data at the start of the week showed the ECB had not intervened," Bloomberg economist Maeva Cousin.

The decision to more directly grapple with the pricing of government debt opens a new chapter in an already fraught relationship with bond markets that have long troubled ECB presidents, not least since the region's sovereign crisis struck more than a decade ago. Last year, a remark by Ms Lagarde on spreads rocked debt markets by appearing to undermine previous pledges to defend the integrity of the eurozone.

The euro pared an earlier advance and was up 0.2 per cent to US$1.1950 after Ms Lagarde spoke on Thursday. European bonds held gains, with Italy's 10-year yield falling nine basis points to 0.58 per cent. German 10-year bond yields, seen as the benchmark for Europe, have climbed around 20 basis points since the start of February.

Still, the premium demanded by investors to hold Italian debt over Germany, a key risk gauge for the region, has fallen by a similar amount over that period, alleviating one key source of concern for the ECB. BLOOMBERG

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