Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

ECB to delve into what 'favourable financing' means as questions mount: sources

EconomyJan 22, 2021 09:56AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt

By Francesco Canepa, Balazs Koranyi and Frank Siebelt

FRANKFURT (Reuters) - European Central Bank policymakers are set to delve deeper at their next meeting into how they measure borrowing costs in the virus-hit euro zone economy after failing to reach an agreement this week, four sources told Reuters.

The ECB has pledged to maintain "favourable financing conditions" to help the bloc recover from the economic shock of the pandemic, but it has never spelled out how those are measured.

The issue is crucial as it determines how many bonds the ECB will buy under its pandemic-fighting scheme, which is the object of some market speculation after the bank said on Thursday it did not need to exhaust its 1 trillion euros of remaining firepower.

Policymakers will hold a seminar at their March 10-11 policy meeting and debate which indicators should be included, whether they should be looked at individually or condensed into an index, and how this should be communicated -- if at all, the sources said.

Not all policymakers are convinced about the merit of an index as that would tie their hands by preventing them from focussing on stresses that may be building only in certain corners of the economy, one source said.

And the notion of making that information public is also making many nervous in light of recent history, some of the sources added.

Former President Mario Draghi made a rod for his own back by elevating a certain market-based measure of long-term inflation expectation as the ECB's favourite, causing market participants to obsess about it and ultimately reducing its informative value.

An ECB spokesman declined to comment.

President Christine Lagarde raised more questions than answers on Thursday when she said the ECB was not just looking at the bond market, but rather making a "holistic assessment" of "multiple indicators" without elaborating.

Lagarde was trying to bat back suggestions the ECB was actively capping bond yields or spreads but she could not be more specific as policymakers at the Jan. 20-21 policy meeting did not reach a conclusion after extensive discussions, the sources said.

Rate-setters also disagreed on whether the euro zone's economy was still facing predominantly "downside risks" but those taking a more optimistic view were in a minority, the sources said.

PEPP ENVELOPE

Some policymakers believe that government bond spreads -- that is the premia that more indebted countries pay compared to safe-haven Germany -- and bank lending rates were the two most relevant indicators at present, one source said.

Indeed they were the only two mentioned by Lagarde during her press conference.

But that failed to reassure investors, with spreads between Italian and German bonds widening on the perception that the ECB was less committed to using the whole envelope earmarked for its Pandemic Emergency Purchase Programme (PEPP).

Lagarde had said "if favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full".

But the sources said this was not meant to be a new policy signal as she had already said the same in December and the inclusion of that sentence in the ECB's press release accompanying the policy decision had not been discussed by the Governing Council.

ECB Chief Economist Philip Lane has often cited the difference between 10-year bond yields issued by euro zone governments and the overnight index swap rate paid by banks to finance themselves on the money market as a useful alarm bell on financing conditions.

When that spread widened in March, the ECB responded by buying large amounts of government bonds issued by Italy, the euro zone country hit hardest by the first wave of the coronavirus pandemic.

In a speech in June, Lane also drew attention to an index of financing conditions based on money market rates, the euro’s exchange rate and euro zone equity prices.

ECB to delve into what 'favourable financing' means as questions mount: sources
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email