LONDON – The European Central Bank may adjust its coronavirus stimulus program, the German central bank governor told CNBC on Wednesday, with officials wary of recent increases in yields.
ECB members spoke of rising eurozone government bond yields at the end of February “unwelcome and must be resisted” – highlighting concerns that borrowing costs for European governments could rise and jeopardize economic recovery in the region .
The ECB sought to reduce borrowing costs following the pandemic, with the implementation of a government bond purchasing program known as PEPP. But the recent moves in the bond market could jeopardize these efforts and lead to more action by the Frankfurt institution.
“We have ways to respond to this,” Bundesbank governor Jens Weidmann told CNBC’s Annette Weisbach on Wednesday about the rise in bond yields.
“The PEPP has flexibility and we can use this flexibility to respond to such a situation,” he added.
Since it was first announced in March 2020, the ECB’s emergency pandemic program has been extended in duration and quantity. It will currently run until March 2022, with a total of 1.85 trillion euros ($ 2.23 trillion).
However, data show that the ECB’s debt purchases have declined in recent weeks. Although the central bank explained the decline in larger redemptions, analysts questioned the reasons behind the decline in net purchases.
Asked whether the ECB could sharpen purchases again to deal with higher borrowing costs, Weidmann said: “Of course, it is one element that is on the table, to use the flexibility to implement the PEPP.”
“But again, the first step is to analyze the causes and also see what effect we have on our ultimate goal, namely price stability,” he added.
The next meeting of the ECB is on 11 March.
German Bundesbank president Jens Weidmann.
Ints Kalnins | Reuters
Risks of government debt purchases
Weidmann has traditionally been on the hawkish side of monetary policy and advocates for less central bank intervention. Weidmann spoke at a press conference on Wednesday, recalling the risks of large purchases of government debt.
“However, such purchases are also associated with risks, especially as they could blur the line between monetary and fiscal policy,” he said.
“The most important issue for me here is that monetary policy should keep a sufficient distance from government monetary financing. This includes ensuring that incentives for sound public finances are maintained,” he adds.
In this context, ECB officials have suggested that they may not reach the full amount of government bond purchases. ECB President Christine Lagarde said in December “the envelope does not have to be used in full.”
Future stimulus decisions are likely to depend on the evolution of the pandemic as well as the price dynamics. The ECB’s policy mandate is to keep inflation “near but below 2%” in the medium term. Data in January showed that inflation had risen to the highest level since the public health emergency, to 0.9%.
In addition to the pandemic, the ECB is also looking at climate risks. The central bank is assessing how ‘effective in the fight against climate change’ can be and this could lead to a change in some of its policies. Recent reports, however, have suggested that it could disappoint climate change campaigners by buying only securities of so-called greener assets.
German debt rule
In his home country, politicians are divided over the future of German finances, and some are asking whether the debt brake rule should be reformed. This policy was introduced about a decade ago and restricts the German government when it incurs new debt.
However, some politicians argue that Berlin will need more flexibility to spend more to promote economic recovery after the pandemic.
At the press conference, Weidmann said: “After the pandemic, however, it will be about getting public finances back on a sound footing, as Germany will face further fiscal challenges in the long run.”
He cites pensions, health care, climate protection and education as emerging major expenditures for the German government.
However, Weidmann does not think that fiscal consolidation should take place overnight, but rather a process that is spread “appropriately across the economic recovery”.
Nevertheless, he called on all European countries, not just Germany, to restore their public finances.
“But all member states of the monetary union, not just Germany, will have to get their budgets in order after the crisis. In the euro area, it is especially the – in some cases – very high debt ratios that need to be brought back. Reliable,” he said. said.