Frankfurt, Germany (AP) — The European Central Bank said Thursday it will step up its bond-buying stimulus program to keep the region's lagging economic recovery from being derailed by a premature rise in borrowing costs.
The central bank for the 19 countries that use the euro said that over the next quarter the purchases would be conducted “at a significantly higher pace than during the first months of the year."
Yields on long-term government bonds have risen by about 0.3% since the start of the year in the eurozone. That is not much, and rates remain low. But the ECB wants to avoid any premature tightening of credit while businesses are still struggling with coronavirus lockdowns.
ECB President Christine Lagarde told a news conference that the rise in market borrowing rates, “if left unchecked, could translate into a premature tightening of financial conditions for all sectors of the economy. This is undesirable.”
The bond purchases have the effect of pushing down bond yields, which are used as benchmarks for borrowing across the region. So a faster pace of bond purchases would in theory help keep credit cheap for companies who need to invest or borrow to get through the pandemic. Businesses are reeling from the economic impact of government restrictions on public life, which are meant avoid new coronavirus infections.
The rise in longer-term borrowing rates is regarded as a spillover from the U.S., where the economic recovery is expected to be faster. The eurozone is still in a double-dip recession and is seen by economists as not ready for rising rates. Output shrank 0.6% in the last three months of 2020 and probably declined again in the first quarter of this year, say economists.
The ECB bought 59.9 billion euros in February and 53 billion euros in January. The purchases ran as high as 120 billion in June 2020. The purchases will come out of the total of 1.85 trillion-euro set aside for the program; almost 1 trillion euros of that has yet to be used. The ECB says it will continue the purchases until at least the end of March 2022, and in any case until it judges that the pandemic crisis phase is over.
The central bank's move underlines how the eurozone is lagging behind other major economies in recovery. China was the only major economy to grow last year, and the U.S. is expected to reach pre-pandemic levels of output by the middle of this year.
By contrast, the eurozone economy is not expected to recover until mid-2022, held back by a slow vaccine rollout and lower levels of government relief spending compared with the U.S. The U.S. Congress on Wednesday approved a wide-ranging $1.9 trillion relief package pushed by new President Joe Biden, coming on top of previous relief legislation under predecessor Donald Trump.
The ECB's move caused a immediate reaction in financial markets, with bond yields sliding and stock markets rising in Europe.
The ECB is the monetary authority for the 19 of 27 European Union member countries that have joined the common currency. It plays a role analogous to that of the U.S. Federal Reserve, the Bank of Japan or the Bank of England in the U.K. It can steer market interest rates in ways best for the economy, using short-term benchmarks such as its weekly lending to bank or intervening in the bond market to affect longer-term rates.