The ECB meeting minutes made it abundantly clear that the March decision to significantly increase PEPP purchases wasn’t implicit yield curve control, but the main area of concern was the rise in longer-dated yields and the risk free rate and the impact it could have on broader financial conditions.
ECB Governing Council Member Philip Lane argued that while the steepening of yield curves across the euro-area wasn’t as pronounced as it could’ve been and that the rise in back-end yields occurred from low levels, the impact this could have on broader financial conditions may undermine the ECB’s accommodative stance outlined back in December’s meeting. For this reason, Governing Council members agreed with Lane to ramp up PEPP purchases to cap the rise in longer-term yields before the effects started to trickle down into other financial instruments. With economic conditions not improving much since December’s meeting, it made sense that the ECB reverted back to the 2020 average when ramping up its PEPP purchases, with any further increases likely to invite speculation that the ECB had a tolerance level to yields.
Going forward, the improvement in economic conditions will be a key determinant for the ECB when deciding to slow down PEPP purchases as rising yields would need to be reflected in improving economic conditions.
Given the latest decision, it is reasonable to assume that a tapering of PEPP purchases will be the marginal normalisation tool for the ECB in the coming quarters.
However, fears of early tapering in the euro area have been assuaged by the ECB promising net asset purchases until at least March 2022, which was reiterated by Isabel Schnabel a week after the March meeting.
This helped to anchor real interest rates while the near-term growth outlook remains highly uncertain. While this doesn’t pose too much of a drag on EURUSD at present due to the Fed employing a similar policy, it could rear its head in the near future should economic conditions not allow the ECB to ease PEPP purchases. Going forward, the question will be what the ECB’s threshold for higher bond yields will be both before and throughout the reopening phase and how the Fed’s tapering timeline will affect the ECB’s bond-buying, and, in turn, yield spreads.
ECB effectively anchors front-end and belly of the weighted average yield curve via increasing PEPP purchases
ECB meeting minutes outline why purchases were only increased to 2020 average in order to maintain favourable financing conditions
Author: Ima Sammani, FX Market Analyst