April 11, 2021

Guindos ensures that the ECB has enough ammunition to cope with the increase in bond yields


Berlin

Updated:

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“We have room for maneuver and we have ammunition.” The message is that everything is under control and that the European Central Bank (ECB) will continue to do whatever it takes. In a new self-interview format that the ECB has posted on its website since this morning, its Vice President Luis de Guindos shows unconcern about the recent increase in yields and reassures. “For the moment, our priority is to maintain favorable financing conditions. We have recently seen an increase in yields, which is partly due to the expectation of higher inflation in the United States due to President Biden’s program, as well as rising commodity prices and the recovery in global demand. “, Explain. “We will have to see if this increase in nominal returns has a negative impact on financing conditions. If we conclude yes, then we are totally open to recalibrating our program, including our pandemic emergency purchase program envelope (PEPP) if necessary ”, he announces Sour cherries, underlining that “we have room for maneuver and we have ammunition, but there is good news. Even though yields have increased, we have not seen spreads widening, which is a sign that in terms of avoiding fragmentation, our program is working. ‘

De guindos also highlights that yields are increasing, “both in central and peripheral countries” and warns that “this will be the key factor for our future in the coming weeks and months. monetary politicsThat is, to understand if this increase in yields is due to the evolution of inflation or if there are other factors that could hinder the economic recovery. He concludes on this matter that “one thing is clear: we have the necessary flexibility to react.”

The ECB considers that the incipient yield on debt does not have to be negative. Isabel Schnabel, member of the government council, had already advanced that the entity has “some margin” to lower short-term interest rates even further and the German Bund reached its highest since May 2019 after this statement (-0.25%), while the debt Spanish scored + 0.43%. In any case, and no matter how much burden it may entail for the States, Guindos mentions that “the Treaty not only prohibits the cancellation of the debt, but it would be harmful to everyone.

From the outset, it would lead to a very significant drop in the flow of remittances or dividends that central banks transfer to the tax authorities of their respective countries at the end of each year. If you pay off some of the debt, the proceeds would have to be used to cover that loss rather than used to pay dividends. What is gained from the improvement in the debt ratios of the countries would be offset over time by a lower flow of dividends paid by the ECB and the national central banks to the different governments. So from a purely arithmetic point of view, that could be detrimental to everyone. Furthermore, making such a decision could pose a risk to the credibility of the central bankas it could be interpreted as fiscal dominance, which could undermine the effectiveness of our policies.

Guindos, moreover, points out that now everything depends on the development of the vaccination campaign and the plan NextGenerationEU, which will focus more on the countries that have suffered the most from the pandemic. “What I want to emphasize is that we would like the plan to be implemented as soon as possible,” he insists, “but there is something that is quite obvious: it is very important that the money is spent on projects that increase growth in the medium term, that increase the potential growth of economies. This is not just something to subsidize current spending. These resources, which are enormous, should not only be used for short-term objectives, but should also be used as an instrument to improve the functioning of the economy in the medium term. But yes, the time it is taking to implement the plan is a vital question and I hope that by the middle of the year we will start to see the funds flowing to the different countries.

The Vice-President of the ECB downplaying increases in inflation, especially in Germany, and summarizes that “I would say that we do not have to worry much about inflation in the short term, and in the medium term we will continue to analyze it very carefully, as we always do. There are structural factors that could drive inflation around the world, for example supply chains will be more regional than before and globalization will not be as fast as it was in the last ten years. But in the short term, in the next 12 months, inflation will remain below our target on average. It also suggests the relevance of the review of the strategy of the ECB, in the sense that it will convert into conventional instruments that until now were considered extraordinary. “The PEPP it is a temporary program linked to the evolution of the pandemic. We will recalibrate the program based on the evolution of the pandemic and the impact that the pandemic is having on the economy. It is something that will continue to exist until the pandemic and its consequences have come to an end.

Going forward, this is a question that will be part of our strategy review, where we will examine a number of issues, including defining price stability, how we calibrate prices. side effects In our decision-making process, the consideration of secondary objectives and the instruments that we use ”, he points out,“ in my opinion, and I would like to emphasize that this is my personal opinion, the most important part of this review of the strategy will be to analyze how we are going to use our instruments. And my own approach is that we should have all the instruments available. We are using instruments classified as non-standard but which are becoming more mainstream and will be part of any central bank’s toolkit. But we must be careful with the secondary effects they could have, mainly in terms of financial stability.

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