President of the European Central Bank Christine Lagarde.

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LONDON – The European Central Bank has announced that it will “significantly” increase its bond purchases in the next quarter after borrowing costs in the region rose.

The ECB decided on Thursday to leave its Emergency Pandemic Purchase Program (PEPP) unchanged at a total of 1.85 trillion euros (2.21 trillion US dollars), which is expected to be in effect through March 2022.

However, the central bank’s bond purchases in the first quarter were lower than usual, and the Frankfurt-based institute expected to increase its purchases in the future.

“On the basis of a joint assessment of the financing conditions and the inflation outlook, the Governing Council expects the purchases under the PEPP to be made significantly faster in the next quarter than in the first few months of this year,” said an ECB statement.

Eurozone bond yields have risen since February after their counterparts in the US rose after President Joe Biden announced a massive stimulus package. It has led to fears that rising yields could hurt Europe’s economic recovery by increasing borrowing costs for countries already grappling with the coronavirus crisis.

However, the ECB’s statement on Thursday calmed markets and bond yields fell in the euro zone. The central bank’s commitment to buying more will support bond prices and, in turn, help keep borrowing costs lower. Bond yields move inversely with prices.

“The Governing Council will buy flexibly according to market conditions to avoid tightening funding conditions that is inconsistent with the downward impact of the pandemic on the forecast inflation path,” added the ECB in its statement.

Speaking to CNBC earlier this month, ECB member Jens Weidmann said changes to the central bank’s government bond purchase program could be made to calm bond markets.

However, this is a sensitive issue for the central bank, which does not go directly to bond yields as it is not part of their mandate. Such moves could spark criticism for protecting eurozone governments from market dynamics and create expectations that they could act whenever yields rise.

The central bank also decided to leave interest rates unchanged.

Economic outlook

As early as December, the ECB forecast that gross domestic product (GDP) in the euro zone will increase by 3.9% this year and 4.2% in 2022. The ECB will present new estimates on Thursday.

However, some EU countries are still blocked, while others are subject to strict social restrictions. In addition, the introduction of Covid vaccines in the region has been slow. This could put further pressure on the eurozone economies and hamper their economic recovery.

The ECB has urged the various governments to step up their fiscal responses, arguing that the burden cannot rest on the shoulders of the central bank alone. The European Union agreed to an unprecedented fiscal stimulus last year, but these funds are not due to be disbursed until this summer.

“A bigger fiscal stimulus can contribute to higher business confidence, increase capital formation, boost employment, raise inflation (expectations), and if central banks curb the rise in nominal returns, lower real interest rates can further support growth,” said Florian Hense, Economist in Berenberg said in a note on Tuesday.