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Our views 23 February 2021

The ECB is missing the bigger picture – again

5 min read

What happens when markets capture decision makers? We had a great example yesterday in a speech given by European Central Bank (ECB) President Lagarde.

The gist, as I understand it, was that the ECB was concerned that rising government bond yields could undermine the euro area economic recovery. There are so many things wrong with this that I don’t know where to start.

First, the mindset has to be challenged that current yields are a key determinant of economic activity. At the moment, it is the other way around: yields reflect economic prospects. What the euro area needs is stronger growth, not lower government bond yields, and the former is not predicated on the latter. Second, even if you bought into the ECB narrative, you would have to question whether the move up in yields is material. If the ECB is concerned about German rates becoming slightly less negative, it really does suggest a complete lack of perspective. Third, it demonstrates, yet again, the inherent problems of relying on monetary policy and the impact on bond yields as the only tool in your box.

Present euro rates are not normal and will rise over time. Fretting about Germany rates moving to a negative 0.3% suggests to me that the myopia of markets has captured central bankers. Policymakers should instead focus on stimulating growth – treat the cause not the symptom.

The views expressed are the author’s own and do not constitute investment advice.