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Central banks, one year on since the pandemic was declared

12 March 2021

Jonathan Marriott, Chief Investment Officer

A year ago, the World Health Organisation declared the COVID-19 coronavirus a pandemic. In the year since, we have seen huge efforts to try and stop the spread of the virus and to protect the economy. Economies on both sides of the Atlantic have been hit hard, but news this week shows the significant differences in approach and varying degrees of success. 

Earlier this week, the European Central Bank (ECB) announced that they will significantly increase the pace of bond purchases under the Pandemic Emergency Purchase Programme (PEPP). They predict any rise in inflation this year to be transient and expect inflation below the 2% target over the next few years. Hopes have been pinned on the vaccine rollout, but this has been delayed and slower than in the UK and US. Across the European Union, about ten doses have been administered for every hundred people. By comparison, in the UK and US, the figure is three times higher.[1]

In July last year, EU heads of state agreed a 750 billion pandemic recovery plan, known as the Next Generation EU fund. It took until 20th December 2020 to get budget approval. And yesterday, eight months since the leaders first agreed this package, ECB President Christine Lagarde called on the EU to speed up the delivery of these funds. Having called for more fiscal stimulus to match their monetary stimulus, the ECB must be frustrated by the speed of delivery. The ECB has made it clear that monetary support will be there for a prolonged period of time. Although Lagarde said they were not doing yield curve control, it is clear that the sell-off in longer dated bonds is one reason for the increased pace of buying. The PEPP envelope has not been increased but the ECB is ready to do so if necessary, although they also clarified that not all of it would be used if not required.

A year ago, equity markets were falling sharply and corporate bond spreads were ballooning. Lagarde added fuel to the fire when she said, "We are not here to close spreads”, referring to sovereign bond spreads. Yesterday, the message was very different. They were unusually clear in their explanation. What drove the decisions are financing conditions which include short and longer dated interest rates, corporate bond yields and bank-lending. The ECB is clearly looking to avoid the mistake of last year.

Meanwhile, yesterday, President Joe Biden signed the latest $1.9 trillion American Rescue Plan into law less than two months after his inauguration. Cheques of $1,400 will start being distributed this weekend. He is already working on an infrastructure plan that may see a further $1 trillion in spending.

While the EU argues over delivery and safety of vaccines, the UK and US (under Biden) have pushed ahead with a real sense of urgency. Biden, in his address last night, said he hoped that, by Independence Day, they could celebrate without COVID-19 restrictions. The concern now in the US is that they are doing too much rather than too little and, when the US Federal Reserve (Fed) meet, they will have a very different economic outlook to consider compared to the ECB. The Fed and ECB may both be concerned about the speed of the rise in bond yields we have seen in the last month, but with German 10-year bunds yielding -0.32% and US Treasuries at 1.6% the position is very different. In both cases, they see a rise in inflation this year as transitory and we do not expect rate rises any time soon. While the economic recovery in the US may see rate rises sooner than in Europe, the Fed target for unemployment may mean that they remain on hold for a prolonged period of time.

[1] https://ourworldindata.org/grapher/covid-vaccination-doses-per-capita


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