ECB to Speed Up Bond Purchases to Prop Up Sluggish Economy

FRANKFURT—The European Central Bank will step up efforts to contain borrowing costs that have surged amid brighter prospects for the U.S. economy and a relaxed stance from the Federal Reserve, aiming to shore up the flagging eurozone economy.

Transatlantic Drift

The U.S. economy is expected to far outpace the eurozone this year, but borrowing costs are rising on both sides of the Atlantic, a headache for the ECB.

Annual GDP, change from previous year

The divergence in near-term economic prospects between the U.S. and eurozone has made policy-making more difficult for the ECB than for the Federal Reserve, which signaled recently that it wouldn’t seek to stem a rise in Treasury yields. That stance has rippled around the world, pushing up borrowing costs in both developed and developing countries.

At a news conference Thursday, President

Christine Lagarde

said the ECB would seek to counter a recent increase in bond yields, part of which she said reflected higher growth expectations in the U.S. rather than a recovery in Europe. Very high debt levels in some European countries—particularly in the south, where debt is more than 150% of gross domestic product—leave the eurozone especially vulnerable to rising borrowing costs.

To contain yields, the ECB will significantly accelerate purchases under a €1.85 trillion bond-buying program, equivalent to $2.2 trillion, unveiled a year ago. That program aims to purchase government debt with the goal of keeping down yields. “We are moving into action as early as tomorrow,” Ms. Lagarde said. The ECB also left its key interest rate unchanged at minus 0.5%.

The ECB’s move surprised investors and ricocheted through financial markets, pushing down European bond yields. That takes pressure off embattled European governments like Italy’s, whose benchmark 10-year bond yield declined to 0.577% from 0.681% on Wednesday, reaching the lowest level in three weeks. Yields move inversely to prices.

The eurozone economy is expected to grow by about 4% this year, compared with 6.5% in the U.S., according to the Organization for Economic Cooperation and Development. That divergence reflects a larger U.S. fiscal stimulus and faster vaccine rollout, the OECD said this week.

Bond yields are increasing in the U.S. because investors expect the Fed will move sooner to increase interest rates to contain inflation, which is likely to rise as businesses and workers spend more money. In the eurozone, bond yields are rising in part because investors can receive higher premiums in the U.S.

ECB officials had signaled in recent days that they were concerned about surging eurozone bond yields, which spill over into higher financing costs for eurozone households and businesses. But the ECB had until now stopped short of accelerating its bond purchases, which it can do at any time.

“This is a bold and smart move, which dispels ambiguity, provides clear guidance to financial markets and puts the ECB ahead of the curve for some time,” said

Marco Valli,

an economist with

UniCredit Bank

in Milan.


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Federal Reserve policy makers will meet on March 16-17 to consider their next move. Fed Chairman

Jerome Powell

last week gave no sign that the central bank would try to check a recent rise in Treasury yields, prompting them to rise further.

Ms. Lagarde wouldn’t say how much debt the ECB might buy in the coming weeks, or whether the central bank might enlarge its emergency bond-buying program, known as the Pandemic Emergency Purchase Program. Analysts suggested the ECB might accelerate its purchases to around €90 billion a month from €60 billion currently.

The ECB has twice expanded the emergency program in recent months, most recently to €1.85 trillion in December, and it has around €1 trillion of unused buying power. The central bank said Thursday that it would continue buying bonds at least through March 2022 and was ready to alter the scale of the emergency program if necessary.

Ms. Lagarde also didn’t shed light on a crucial question for investors: Is the ECB uncomfortable with borrowing costs at their current levels, or worried that they will rise higher? That ambiguity could lead to more bond-market volatility in the future, analysts said.

“As long as markets behave it may be enough,” said

Frederik Ducrozet,

a strategist with Pictet Wealth Management in Geneva. “But if bond yields start to rise again, the ECB might be forced to clarify this point.”

Write to Tom Fairless at [email protected]

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