What's going on?
Here’s something to help investors chill out in these stressful times: the European Central Bank effectively promised on Wednesday to keep eurozone bond yields from rising.
What does this mean?
Just like the US, the eurozone’s pumped huge sums of money into its economy to keep things ticking over throughout the pandemic. And now that a recovery’s on the cards, investors have started to worry all that cash will send product prices higher – and that inflation will then force the region’s central bank to prematurely raise interest rates.
But while the ECB acknowledged inflation had picked up, it seemed confident that it was a short-term feature fueled in part by tax hikes and higher energy prices. Over the medium term, it still doesn’t think inflation will hit its long-standing target. Now, then, the central bank’s plan is to leave interest rates where they are and speed up its bond-buying instead.
Why should I care?
For markets: The ECB is keeping bond yields down.
By accelerating its bond-buying, the ECB will increase demand for eurozone bonds. That should push their prices up and their yields down, which should signal to countries, companies, and investors alike that borrowing money in Europe is still cheap. And that, in turn, should hopefully encourage them to invest in economy-growing activities. The announcement alone worked a treat: Italy’s 10-year government bond yields dropped almost immediately afterward.
The bigger picture: Central banks’ messaging isn’t always straightforward.
For investors, the ECB’s message was clear: rising bond yields are a concern even if inflation isn’t. If only the Federal Reserve’s thinking was as easy to follow: the US central bank confused investors recently when it said it wasn’t anticipating making any changes to its interest rate policy. That’s despite the country’s improving economic growth outlook, which would usually come with at least the hint of a future adjustment…