ECB’s Müller: Shouldn’t Overestimate Role of Long-Term Yields in Recovery

17 March 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller said Wednesday that the role of long-term yields in the economic recovery shouldn’t be overestimated.

In a speech text posted to the website of the Estonian central bank, which he heads, Müller said that recently risen sovereign bond long-term yields reflected the fact that ‘some optimism about the outlook is returning globally.’

He continued: ‘Even so, we can say that at current levels the interest rates will not be holding back the recovery from the crisis. We should not overestimate the role of long-term sovereign yields on the recovery of the economy or the decisions of the central bank, especially as cost of borrowing for companies and households remains very low.’

Long-term sovereign yields are ‘one indicator among many’, he said. Low interest rates alone are not the way out of the crisis, he said, but rather, the low borrowing costs should go to finance future growth.

The ECB hiked to 1.5% its 2021 HICP forecast because of one-off factors that will temporarily push inflation towards 2% in the second half, he said. ‘Given the continuing weakness in the demand environment, the low growth in wages and the large amount of economic resources standing idle, though, we do not yet see any consistent inflation pressures building up’, he said.

Inflation would remain under target through 2023, he predicted.

Noting the high debt incurred by euro area governments in mitigating the impact of the pandemic, Müller said low borrowing costs meant this was ‘not current a problem … but it must be remembered that interest rates will rise in the longer term.’ Repayment depended on investment that would raise potential growth, he indicated.

To be able to pay off that debt in the future, it is very important to invest now in areas that will lay the foundations for new growth.

In view of the most recent worsening of the pandemic, ‘[t]here remains in consequence a lot of uncertainty about the near future’, he said. However, ‘even if there is to be a delay in opening economies, there is reason to assume that we will be talking about a delay of one or two quarters and not more than that.’

Inflation will however remain below the target of the central bank throughout the forecast horizon up to 2023.