ECB’s Kazaks: Can Tolerate Rise in Yields if it Happens Gradually

14 March 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Martins Kazaks said Sunday that a rise in yields could be tolerated provided it occurred gradually.

In an interview with Bloomberg, Kazaks, who heads Latvijas Banka, was quoted as saying that ‘[i]f the economy performs better, it could be possible to provide less support.’ A ‘rise in yields will need to be accepted. But it should be gradual to avoid premature tightening.’

Kazaks said he would like to see a clearer return to growth so as ‘to get more confidence that this recovery is really under way. We don’t know how the third wave of Covid will play out.’

However, he professed to being more optimistic than three months ago, given the improvement in the U.S. and ongoing vaccination.

‘If we see more of this driven by the strength of the European economy, then an increase in bond yields will not necessarily mean larger purchases’ of bonds, he was quoted.

Kazaks predicted that the ECB’s projection of 4% growth this year would probably be boosted when the staff macroeconomic projections are updated in June.

It being ‘unlikely that wage pressures would go up very quickly’, he said, ‘the inflation outlook is likely to remain quite muted.’

The ECB introduced the objective of preserving favourable financing conditions because it had to ‘provide some other guidance, some other intermediate target’, he said.

Speaking of the ECB’s decision last week to accelerate the pace of asset purchases in response to risen yields, Kazaks said that ‘[t]he size of the package has not been changed, the end date has not been changed, so everything remains as it was. This time we saw the rise in long term yields being too sharp and the market not understanding our symmetric reaction function.’

Depending on how the economic situation evolves, the ECB need not exhaust the entire envelope of the pandemic emergency purchase programme, he said, but could also ‘spend all and more than’ the current envelope of €1.85 trillion.

Decisions need not wait for scheduled meetings, he said.