❗ The European Central Bank has reacted aggressively to rising bond yields but talk can suffice only for a while. What else can the ECB do?
The ECB has been partly successful in talking down bond yields and managed to send DE30 to all time highs and EURUSD clearly lower. But markets have heard the talk and want to see some action. What the ECB could do?
Employ Yield Curve Control (or YCC) – this would be the most decisive action that could send DE30 higher and euro lower. YCC is a policy where the Bank is buying unlimited amounts of bond to provide a cap on bond yields (say -0.2% for German 10 year bond). It’s tempting but ECB representatives have suggested it could be hard to employ (not least because there bonds of many governments) and it looks like a very unlikely scenario.
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Cut deposit rate – already at -0.5% it is one of the lowest in the World. ECB suggested it could do it but it looks unlikely as it hurts the banking sector. Rates are especially important for currencies so a cut could send EURUSD sharply lower.
More QE – the ECB could always “print” more but the current envelope has plenty of space so there’s no practical point in increasing it now. What the ECB can do is to suggest faster pace of purchases and a promise to increase the envelope as much as needed in the future and it looks like this is a scenario that markets are looking towards.
DE30 keeps soaring after breaking previous all-time highs. Will the ECB help maintain this sentiment? Source: xStation