Home » The ECB accelerates the purchases of securities against the rise in yields

The ECB accelerates the purchases of securities against the rise in yields

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The risk of transmission

The upside is not welcome, although it is relatively limited at the moment. «Banks – explained the president Christine Lagarde in a press conference – use risk-free interest rates and government bond yields as reference points to determine credit conditions. If consistent and persistent, increases in these interest rates, if not contrasted, could turn into a premature tightening of financial conditions for all sectors of the economy ”. The “holistic” and “multifactorial” assessment of financial conditions by the ECB takes into account the entire chain of transmission of monetary policy, from yields to the rates offered to the public, and delays in the spread of the effects, avoiding the most possible synthetic and aggregate indicators.

Inflation outlook unchanged

Moreover, it is an increase not justified by the improvement in economic conditions, which remain – explained Lagarde – “uncertain” in relation to the trend of the epidemic and vaccination campaigns (the GDP, moreover, could contract again in this first quarter), nor from the inflation outlook which “is largely unchanged compared to the December projections”.

The acceleration of prices in 2021 is temporary

The March projections now indicate a GDP growth of 4% in 2021, 4.1% in 2022, and 2.1% in 2023 with more balanced risks in the medium term (but still down in the short term). Inflation (annual average) is forecast at 1.5% in 2021, 1.2% in 2022 and 1.4% in 2023, with a marginal upward revision this year and next, However, due to transitory and technical factors, which could also push annual price growth – said Lagarde – to reach 2% at the end of 2020, without however having any consequences on the orientation of the ECB. “We will look beyond,” the president said.

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Euros under control

The Governing Council also confirmed that the exchange rate – another factor that helps determine financial conditions – will continue to be monitored. The dynamics of international trade, after the approval of the Biden Administration’s maxiplane – which was not taken into account in the March projections – will become increasingly important. “It will have an impact,” Lagarde said several times, referring to foreign demand and growth projections, even if it should not be “overestimated”.

Review the stability pact

President Lagarde, in response to a question, also said that she considered the decision to suspend the stability pact to be right, the requirements of which, once reactivated, will have – it is “our hope”, she said – to be “revised and improved for become simpler and more focused on productivity, investments and also, obviously, on a fiscal discipline integrated into them; perhaps with a renewed approach on the criteria are used. It was decided in the 90s, the situation has changed considerably since then ». A revision is therefore appropriate to guarantee “stability and support solid and sustainable growth”. The projections of the ECB staff were drawn up assuming full application of the pact starting from mid-2022, an “appropriate” time horizon according to Lagarde.

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