Coeure Says ECB Unfazed by Rise in Long-Term Yields in Euro AreaBy
Financial conditions remain ‘highly-supportive’ of recovery
Even so, ECB doesn’t want to contribute to market volatility
An increase in long-term bond yields hasn’t affected the European Central Bank’s policy stance and euro-area financial conditions remain “highly supportive” for the economic recovery, Executive Board member Benoit Coeure said.
The rise in yields appears to reflect market participants pricing out the risk of deflation, which was “certainly good news,” he said on Tuesday, citing an ECB analysis of inflation-linked swap rates. Uncertainty about future fiscal and trade policies in some countries may have contributed to an increase in term premia, though coupled with a better assessment of global economic prospects that doesn’t amount to an unwarranted tightening.
The comments from Coeure, who is responsible for the ECB’s market operations, come as policy makers start to air their views over whether they can afford to signal the beginning of the end of their 2.3 trillion-euro ($2.5 trillion) bond-buying program and negative interest rates. Chief economist Peter Praet said on Monday that the central bank cannot change its stance abruptly as the real economy still has to catch up with the buoyant sentiment in surveys.
“What is even more important is that during this period, and despite stronger global and domestic growth prospects, expectations regarding our monetary policy have, on balance, had a stabilizing effect on yields,” Coeure said in a text of a speech following a meeting of the ECB’s bond-market contact group in Frankfurt. “Forward guidance has served us well and has contributed to keeping the short-to-medium end of the yield curve well anchored at times when external shocks were threatening to unduly tighten financial conditions.”
Germany’s 10-year bond yield, a proxy for the risk-free rate in the euro area, jumped as high as 0.485 percent in March, after being below zero as recently as October. It was at 0.435 percent on Tuesday.
While the ECB accepts market fluctuations as “natural and healthy,” it doesn’t want to contribute to the volatility with its own policies, according to Coeure. That’s why officials are trying to carefully explain their actions and strategy, he said.
“I am convinced that clear and time-consistent communication on our part will avoid unwarranted volatility in financial markets and help preserve the financial conditions necessary for inflation to reach levels closer to 2 percent in the medium term,” he said.