In the hearing of a European Parliament committee, ECB President Christine Lagarde said risks surrounding Eurozone growth outlook over the “medium term” have become “more balanced” owing to better prospects for the global economy and progress in vaccination campaigns. Though, downside risk remain in the “near term”, mainly related to spread of “virus mutations” and implications of ongoing pandemic.
She added that inflation has picked up over recent months mainly on “some transitory factors”, and some volatility is expected through 2021. But the factors are expected to “fade out early next year”. Price pressure would “increase some what this year due to “supply constraints and recovery in domestic demand”. But these pressures will “remain subdued overall”.
On the issue of treasury yields, Lagarde said, “the increase in risk-free market interest rates and sovereign bond yields that we have observed since the start of the year could spur a tightening in the wider set of financing conditions… Therefore, if sizeable and persistent, increases in those market interest rates, when left unchecked, may become inconsistent with countering the downward impact of the pandemic on the projected path of inflation.”
Hence, ECB announced to significantly increase the pace of PEPP purchases over the next quarter. “Purchases will be implemented flexibly according to market conditions and always with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.
