European Central Bank policymakers have said growth and inflation in the euro area are more likely to beat expectations, opening a debate on whether the improving outlook means it is expected to slow the pace of its bond purchases.
At the ECB’s last monetary policy meeting in April, some members of its governing council said risks to economic activity and medium-term inflation expectations had “tilted further upward.” “, According to the report of the discussion published Friday.
While most board members agreed that there were still downside risks to the eurozone’s near-term growth prospects, they pointed to “encouraging” signs of the recent rebound in global demand, the US fiscal stimulus and the faster pace of Covid-19. vaccinations in Europe.
“Against this background, it was generally considered that the risks to the business had become more balanced over the medium term horizon, the idea being also expressed that they were now on a slightly upward trend,” said the ECB.
Although the council acknowledged that price pressures “remained generally weak,” it said that “while the medium-term policy-relevant inflation outlook was broadly unchanged from the March meeting, the risks weighed on these prospects could be considered as trending upwards ”.
Highlighting how the ECB has become more convinced that the coronavirus pandemic in Europe is under control, its chairman Christine Lagarde plans to invite her fellow board members to meet in person next month for the first time in more than a year.
Debate intensifies within the ECB over whether to slow its emergency bond purchases at the next monetary policy meeting on June 10, when the central bank is also expected to raise its growth and currency forecasts. inflation for the next few years.
Eurozone inflation has rebounded this year, climbing to 1.6% in April, after turning negative at the end of last year. The ECB has predicted that price growth in 2021 will exceed the central bank’s target by just under 2% for the first time in more than two years, before fading to stay below target in 2023.
The ECB decided in March to proceed with bond purchases at a “significantly higher pace” in the second quarter to prevent the liquidation of bond markets from prematurely undermining its commitment to maintain “favorable financing conditions” before a European recovery does not take hold.
Borrowing costs for euro area member states hit their highest level in nearly a year as rebounding economic growth and inflationary pressures dampened the appeal of government bonds. The average yield on 10-year GDP-weighted bonds in the bloc climbed to 0.21%, the highest since June, although still low by historical standards.
The move was largely driven by higher yields on ultra-safe German debt – it is now the only eurozone country to still have sub-zero yields on its 10-year sovereign bonds.
More worrying for the ECB, the additional return paid by the weaker members of the eurozone has also increased. Italy’s 10-year spread over German bonds stood at 1.15 percentage points, down from 0.91 percentage points in February when confidence was boosted by the appointment of Mario Draghi to the post of Italian Prime Minister.