Borrowing costs

European Central Bank steps up stimulus to keep borrowing costs low

The European Central Bank acted on Thursday to counter market forces driving up borrowing costs around the world, saying it would step up its purchases of government and corporate bonds to ensure credit in the euro zone remains cheap.

This action signaled that the bank was less worried about inflation and more about the economic distress caused by the pandemic and the likelihood that the euro zone would be in recession.

The bank previously allocated 1.85 trillion euros, or $2.2 trillion, to combat the effects of the pandemic and keep borrowing costs low. This sum remains unchanged, but the bank will now buy bonds “at a much higher rate only during the first months of this year.

Bond market interest rates have risen in recent weeks on fears that inflation will pick up when growth rebounds. Investors were less inclined to buy bonds at the same exceptionally low rates as before.

But Christine Lagarde, president of the central bank, told reporters on Thursday that a recent rise in inflation was caused by rising energy prices and other temporary factors.

Underlying price pressures remain subdued amid weak demand and a significant downturn in labor and product markets,” Ms. Lagarde said after a meeting of the bank’s board of governors. She added that she expected the eurozone economy to contract in the first quarter of 2021, the second consecutive quarterly decline, due to slow vaccinations and prolonged shutdowns.

Prices in the euro zone rose at an annual rate of 0.9% in March after falling in the last five months of 2020. Some economists expect prices to rise further as the effects of the plan President Biden’s $1.9 trillion stimulus ripples through Europe.

Ms Lagarde said the Board of Governors had not considered the US stimulus package because it had not yet been enacted. Mr. Biden signed the bill on Thursday.

The action announced Thursday sends a strong signal to financial markets, which have tested the central bank’s commitment to keeping lending costs low in the euro zone as governments, businesses and individuals battle the pandemic.

Shortly after the announcement, yields on German 10-year government bonds fell four basis points to minus 0.36%. This is even higher than at the start of this year, when they were minus 0.6%.

Bond yields fuel the broader economy because they set a benchmark for the rates that businesses pay for commercial loans and individuals pay for mortgages and auto loans.

On Thursday, Ms Lagarde repeatedly repeated an earlier pledge to secure “favorable financing terms”, a phrase that has effectively become her mantra.

“Our monetary policy will help bring economies across the bridge of the pandemic we are suffering from,” Ms. Lagarde said.

On Wednesday, after the Board of Governors began its meeting, Greenpeace activists landed powered paragliders on the roof of the central bank headquarters in Frankfurt and unfurled a banner that read “Stop funding climate killers!”

Ms Lagarde said on Thursday she was “on the same page” with activists in many ways, but added: “We don’t think this is the necessary way to have a dialogue.”