LONDON – The European Central Bank may revamp its coronavirus-related stimulus program, Germany’s central bank governor told CNBC Wednesday, with officials wary of a recent hike in bond yields.
ECB members have spoken about how rising government bond yields in the eurozone, in late February, were “undesirable and must be resisted” – highlighting concerns that borrowing costs to European governments might rise and put the region’s economic recovery at risk.
The ECB has tried to contain borrowing costs after the pandemic, with the adoption of a government bond purchase program, known as the PEPP. But recent moves in the bond market could jeopardize those efforts and lead to more action from the Frankfurt-based institution.
“We have a way of reacting to this,” Jens Weidmann, governor of the Bundesbank, told CNBC Annette Weisbach Wednesday, of rising bond yields.
“PEPP comes with flexibility and we can use this flexibility to react to situations like that,” he added.
Since it was first announced in March 2020, the ECB Pandemic Emergency Purchase Program has been extended in duration and quantity. It is currently set to last until March 2022, for a total of 1.85 trillion euros ($ 2.23 trillion).
However, data shows that ECB debt purchases have fallen in recent weeks. Although the central bank has explained the larger redemption decline, analysts question the reasons behind the decline in net purchases.
When asked if the ECB could increase purchases again to face higher borrowing costs, Weidmann said: “Of course this is one of the elements that is 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 of price stability,” he added.
The next ECB meeting is due on March 11.
President of the German Bundesbank Jens Weidmann.
Ints Kalnins | Reuters
Weidmann has traditionally been on the hawkish side of monetary policy, advocating reducing intervention from central banks. Speaking at a press conference on Wednesday, Weidmann recalled the risk of large purchases of government debt.
“But such purchases are also associated with risks, particularly because they can blur the lines between monetary and fiscal policy,” he said.
“The main problem for me here is that monetary policy must maintain a sufficient distance from government monetary financing. This includes ensuring that the incentives for healthy public finances are maintained,” he added.
In this context, ECB officials suggested they may not reach the full amount of government bond purchases. Speaking in December, the President of the ECB Christine Lagarde says “the envelope doesn’t need to be used in full.”
Future stimulus decisions will likely depend on the evolution of the pandemic as well as price dynamics. The ECB’s policy mandate is to keep inflation “close but below 2%” in the medium term. January data showed inflation rose to its highest level since the public health emergency hit, to 0.9%.
Apart from the pandemic, the ECB also looks at climate risks. The central bank is assessing how to be “effective in the fight against climate change” and this may result in changes to some of its policies. However, a recent report suggests it may disappoint climate change campaigners by buying only bonds from so-called greener assets.
In his home country, politicians are divided over Germany’s financial future, with some questioning whether debt-braking rules should be reformed. This policy was introduced about a decade ago and restricts the German government from taking on new debt.
However, some politicians argue that in order to boost the post-pandemic economic recovery, Berlin needs more flexibility to spend more.
At a press conference, Weidmann said: “After the pandemic, however, it will be a matter of returning public finances to a firm footing, as Germany will face further fiscal challenges in the long term.”
He cited pensions, health care, climate protection and education as important upcoming expenses for the German government.
However, Weidmann does not think that fiscal consolidation should occur overnight, but rather a process that spreads “precisely to the rest of the economic recovery.”
However, he asked all European countries, not only Germany, to restore their public finances.
“But all member states of the monetary union, not only Germany, need to manage their budgets after the crisis. In the euro area, especially – in some cases – very high debt ratios that have to be lowered reliably,” he said.