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Smooth operator

11 March 2021 By Swaha Pattanaik

European Central Bank President Christine Lagarde’s natural inclination is to forge consensus before acting. For some euro zone rate-setters, that’s a welcome change from her predecessor Mario Draghi’s aptitude for springing surprises. But the time it has taken the central bank to announce it will step up the pace of its asset purchases in response to rising bond yields suggests there are also drawbacks to this instinct.

Lagarde said on Thursday that the central bank expected a significantly higher pace of bond purchases in the coming quarter than was seen during the first months of the year. And at a news conference held after the ECB’s monetary policy meeting, she underscored the importance of countering too big a rise in government bond yields, which act as the benchmark for borrowing costs for the whole economy. That begged the question why the central bank hadn’t already acted. After all, the yield on 10-year German government bonds rose from minus 0.58% at the end of last year to a one-year high of minus 0.203% towards the end of February.

One reason may be the divergence of views within the ECB. Those concerned about the fragility of the economic recovery want to do more. Their hawkish counterparts have appeared more relaxed about a rise in yields that is a result of better growth prospects. Ensuring both camps are on board before acting fits with the way Lagarde operates. The problem is that it takes time to forge consensus in the ECB’s governing council.

Granted, as Lagarde pointed out on Thursday, monetary policymakers were meeting on a daily basis about a year ago during the pandemic-driven turmoil. But sometimes, an agreement may not be so easy to hammer out and bond moves could become unruly while policymakers try to reach consensus. The increase in purchases announced on Thursday will be enough to keep a lid on yields for now. However, as the recovery gathers pace, fast-moving markets are likely to test Lagarde’s desire, and ability, to keep everyone happy.


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