The European Central Bank intensifies its bond purchases

Based on a comprehensive judgment on financing conditions and inflation prospects in the Eurozone, the European Central Bank decided on March 11 to continue implementing an emergency asset purchase plan with a total scale of 1.85 trillion euros, and significantly increase bond purchases in the second quarter of this year. Experts pointed out that the European Central Bank’s move is aimed at restraining the market’s medium and long-term interest rates from rising too fast and ensuring favorable financing conditions in the euro zone.

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Since the beginning of this year, with the widespread advancement of new crown vaccination, investors have become more optimistic about the economic prospects, and have increased their expectations of a rise in the inflation rate. They have begun to sell a large number of medium and long-term treasury bonds with fixed coupon rates and risk aversion as investment purposes. Treasury bond market prices have fallen and yields have risen.

In Europe and the United States, the 10-year Treasury bond yield is generally regarded as the most important mid- and long-term market benchmark interest rate, which not only directly affects the government and corporate bond issuance costs, but also affects the interest rate level of medium and long-term loans issued by financial institutions to households and companies. .

Since mid-February this year, along with the continued decline in treasury bond prices, the yields of medium and long-term treasury bonds in major European and American markets have accelerated. Among them, the German 10-year government bond yield rose by about 20 basis points from February 12 to 25 alone.

Carsten Brzeski, head of the Macro Research Department of ING International Group, pointed out that bond yields have risen rapidly recently and market concerns about inflation have intensified. How the European Central Bank responds to these changes has become the focus of market attention.

The monetary policy resolution announced by the European Central Bank on March 11 clearly demonstrated its willingness to curb bond yields.

On the same day, the European Central Bank raised its economic growth forecast for the Eurozone to 4% in 2021, and it is expected to grow by 4.1% and 2.1% in 2022 and 2023, respectively; it raised its inflation forecast in 2021 to 1.5%, and it is expected to be 1.2% and 1.4% in the next year. .

European Central Bank President Lagarde said that since the beginning of this year, market interest rates have generally risen. Since banks use risk-free interest rates and sovereign bond yields as the main reference for determining credit conditions, if market interest rates continue to rise sharply and are not controlled, it may lead to premature tightening of financing conditions in all economic sectors.

Regarding the new round of large-scale economic rescue plans recently launched by the United States, Lagarde said that the European Central Bank’s economic growth and inflation forecasts have not yet taken it into consideration, but she believes that its impact should not be overestimated.

Brzeski believes that although the European Central Bank said it will increase asset purchases in the next few months, it is unlikely to further increase the total size of asset purchases, because the European Central Bank’s risk expectations for the economic outlook have significantly improved.

Krueger, chief economist at Ramper Bank in Germany, said that the European Central Bank plans to significantly increase bond purchases, mainly to avoid rising interest rates and worsening financing conditions.

At present, the European Central Bank and many economists believe that the increase in inflation this year is only a temporary phenomenon, mainly driven by certain one-off factors, such as the temporary reduction of value-added tax in Germany last year and the low base of energy prices.

In response to the impact of the new crown pneumonia epidemic, the European Central Bank announced in March last year the implementation of a highly flexible emergency asset purchase plan.

According to data from the European Central Bank, as of March 5 this year, the plan’s remaining debt purchase quota is still as high as more than 970 billion euros.

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