ECB doesn’t want a premature spike in borrowing costs, Dutch governor says

A woman walks past a closed cafe as Rome becomes a ‘red zone’, going into lockdown, as the country struggles to reduce the coronavirus disease (COVID-19) infections, in Rome, Italy, March 15, 2021.

Yara Nardi | Reuters

LONDON  — European Central Bank Governing Council member Klaas Knot said Thursday he doesn’t want to see a premature run-up in government bond yields and that the ECB could take action to address this if needed.

Speaking to CNBC, Knot said it would be legitimate for the ECB to frontload bond purchases as part of its emergency pandemic program if rising yields from other regions started to affect the euro zone.

“If it (rising bond yields) is due to better growth and inflation prospects then that’s entirely benign, but if it is due to spillovers coming from different regions in the world then I think it is entirely legitimate for us to temporarily frontload some of the purchases,” Knot, who is also president of the Dutch central bank, said.

“Because we don’t want the runup in bond yields to prematurely tighten our financing conditions. And with ‘prematurely,’ I mean a tightening that would precede the actually improvement growth, the actual recovery in growth and inflation in the euro area.”

His comments come after the ECB decided at its last meeting in early March to ramp up its bond buying within its emergency program. It’s not planning to expand the total size of the program, but wants to buy more within the current limits as it looks to keep borrowing costs low for euro area governments.

It came against a background of rising government bond yields which ECB officials were concerned could derail the economic recovery in the region.

The euro area is still waiting for coronavirus relief funds at the EU level, and many countries are grappling with a third wave of infections, as the pace of vaccinations lags other parts of the world. All of these factors pose risks to the 19 economies that share the euro.

Greener purchases

Speaking last month, Knot said the ECB could adjust its bond purchases to support greener investments. This has become a heated topic in the euro zone as the ECB looks at ways to consider climate change risks within its actions.

Going forward, the central bank could potentially buy more bonds of greener assets or penalize high-polluting companies. “That’s something we should absolutely consider,” Knot said during a conference, according to Reuters. But he added that the benchmark allocations to do so should not come from the central bank itself.

The ECB has forecast a 4% GDP (gross domestic product) rate for the euro area this year, after the region contracted almost 7% in 2020. The central bank sees GDP standing 2.3% above pre-crisis levels by the end of 2023.

(With Inputs from cnbc)

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