Yield Curve Control Nonsensical for Euro Area, ECB’s Rehn Says

The European Central Bank (ECB) headquarters stand illuminated at night in Frankfurt, Germany, on Monday, June 29, 2020. A broad coalition of ruling and opposition parties in Germany has agreed on a draft motion to back the European Central Bank’s bond buying program, according to officials familiar with the accord, likely ending a standoff that was triggered by the country’s constitutional court last month.
The European Central Bank (ECB) headquarters stand illuminated at night in Frankfurt, Germany, on Monday, June 29, 2020. A broad coalition of ruling and opposition parties in Germany has agreed on a draft motion to back the European Central Bank’s bond buying program, according to officials familiar with the accord, likely ending a standoff that was triggered by the country’s constitutional court last month. (Alex Kraus/)

(Bloomberg) — There are better ways than yield curve control to achieve favorable financing conditions in the euro area, given the differences between its 19 member states, according to European Central Bank Governing Council member Olli Rehn.

Yield curve control, proposed as one option by, among others, Spanish central bank Governor Pablo Hernandez de Cos, “would be a rather mechanical approach” to the question of financing conditions, and “not sensible” given the euro area has at least 19 different yield curves, Rehn said in an interview on Finland’s YLE TV1.

The ECB is buying bonds to limit the differences between yields for the strongest and weakest economies in the euro zone, officials familiar with the matter told Bloomberg earlier this month. The central bank has specific ideas on what spreads are appropriate, according to one person, emulating the so-called yield curve control deployed by the Bank of Japan and Reserve Bank of Australia.

The ECB has decided to assess how to define “favorable” financing conditions and what is the best way to determine how those conditions develop, Rehn said.

The decision comes after the central bank ramped up its monetary policy support to the economy in December and partly justified the decision with the need to preserve “favorable” financing conditions for businesses and households. As the meaning of that term hasn’t been made clear yet, investors have little insight into what conditions would prompt further action from the Frankfurt-based central bank.

“We need certain indicators” to examine “how to retain favorable financing conditions, allowing lending to households and companies to function well,” Rehn said. But there should be “no automation” as “it’s better to leave enough room for common sense and consideration,” he said. “In that sense monetary policy is as much an art as it is a science.”

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