LONDON – The European Central Bank could adjust its coronavirus-related stimulus program, the German central bank governor told CNBC on Wednesday, with officials wary of recent hikes in bond yields.
ECB members have spoken of how rising eurozone government bond yields in late February “are undesirable and should be resisted” – highlighting concerns that financing costs for European governments could rise and the region’s economic recovery at risk could bring.
The ECB has sought to contain funding costs in the wake of the pandemic with the implementation of a government bond buying program known as PEPP. But the recent moves in the bond market could jeopardize those efforts and prompt more action from the Frankfurt-based institution.
“We have ways to respond to this,” Jens Weidmann, Bundesbank governor, told CNBC’s Annette Weisbach on Wednesday of the rise in bond yields.
“The PEPP comes with 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 Pandemic Emergency Purchase Program has been extended in duration and quantity. It currently lasts until March 2022 and totals 1.85 trillion euros (2.23 trillion dollars).
However, data shows that ECB debt purchases have fallen in recent weeks. While the central bank has explained the decline in larger repayments, analysts have questioned the reasons for the decline in net purchases.
When asked if the ECB could ramp up purchases again to address higher funding costs, Weidmann said, “This is, of course, an element on the table to use the flexibility we have in implementing the PEPP.”
“But again, the first step is to analyze the root causes and also to see what effect we have on our ultimate goal, which is price stability,” he added.
The next meeting of the ECB is scheduled for 11 March.
German Bundesbank President Jens Weidmann.
Ints Kalnins | Reuters
Risks of Government Debt Purchases
Weidmann has traditionally been on the aggressive side of monetary policy, advocating less central bank intervention. During a press conference on Wednesday, Weidmann recalled the risks of large purchases of government debt.
“Such purchases also come with risks, however, especially as they can blur the line between monetary and fiscal policy,” he said.
“The most important point for me here is that monetary policy must maintain sufficient distance from government monetary financing. This includes ensuring that incentives for sound public finances are maintained,” he added.
In this context, ECB officials have suggested that they may not achieve the full amount of government bond purchases. In December, ECB President Christine Lagarde said that “the envelope does not need to be fully used”.
Future stimulus decisions are likely to depend on the evolution of the pandemic and on price dynamics. The ECB’s policy mandate is to keep inflation “close to but below 2%” in the medium term. Data from January showed that inflation rose to its highest level since the public health emergency, at 0.9%.
In addition to the pandemic, the ECB is also looking at climate risks. The central bank is exploring how it can “be effective in the fight against climate change” and this could result in a change in some of its policies. However, recent reports have suggested that it could disappoint climate change campaigners by only buying bonds of supposedly greener assets.
German debt rule
In his home country, politicians are divided over the future of Germany’s finances, and some question whether the debt brake rule should be reformed. This policy was introduced about a decade ago and limits the German government from taking on new debts.
However, some politicians argue that Berlin needs more flexibility to spend more to boost the economic recovery after the pandemic.
At the press conference, Weidmann said, “After the pandemic, however, it is a matter of putting public finances back on a healthy basis as Germany will face further fiscal challenges in the longer term.”
He cited pensions, health care, climate protection and education as major expenditures for the German government.
However, Weidmann does not believe that fiscal consolidation should happen overnight, but rather a process that is “properly spread over 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 mainly the – in some cases – very high debt ratios that need to be reduced. reliable, ”he said.