German government borrowing costs reversed some of their gains on Friday after Germany’s top central banker played down the chances of an imminent rise in interest rates.
Jens Weidmann, president of the Bundesbank, said in Bavaria on Friday evening that rates in the eurozone would stay at their historical lows for now.
“It would be particularly stressful for the banks if the long period of low interest rates were to be ended by a rapid, sharp increase in interest rates,” said Mr Weidmann. “As far as central bank rates in the euro area are concerned, however, the immediate risk of change is currently low.”
The intervention by the man seen as the European Central Bank’s most hawkish policymaker triggered a fall in the yield on the ten-year German government bond, or Bund, from 0.543 per cent to 0.504 per cent. The yield mirrors the cost of borrowing for the German government, with a lower yield making it cheaper to finance debt.
The move partly reversed a rise in yields seen on Thursday after minutes of the ECB’s December monetary policy vote signalled the bank would soon take another step towards ending its quantitative easing programme. The minutes showed the ECB was reconsidering how the region’s economic “expansion” would weigh on its decision-making, sending yields on German debt to a two-year high.
Markets viewed the ECB’s optimism as a signal that the bank could begin removing some of its crisis-era stimulus sooner than they had expected.
The benchmark ECB interest rate, the main refinancing rate, is at zero. The bank’s deposit rate is minus 0.4 per cent, a rate that in effect imposes a levy on banks that hold their reserves at central banks around the euro area.
Mr Weidmann’s comments underscore the ECB’s commitment to keep interest rates on hold until they stop buying bonds under their €2.3tn quantitative easing programme. The banks has pledged to buy €30bn-worth of bonds each month from now until September.
Interest rates are not expected to rise until the middle of 2019 by most ECB watchers.
“The governing council unequivocally stated that interest rates will remain at their current level for a longer period of time and well beyond the time horizon of net bond purchases. And as you know, bond purchases will continue at half the volume until at least September this year,” the Bundesbank president said.
Mr Weidmann reiterated his opposition to QE, saying the bond purchases were no longer necessary, given the strength of the recovery. He said the ECB should set a specific end date for QE.
Additional reporting by Roger Blitz in London
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