US Rate Hike Signals Would Lift Pressure on ECB

As European Central Bank President Mario Draghi wonders how to keep his bond-buying program going, a little help from Janet Yellen might be welcome.

The Federal Reserve Chair will lead her colleagues to a U.S. interest-rate decision on Wednesday that has implications for the ECB’s plan to ensure its own quantitative-easing program has enough assets to buy. Even if Fed policy makers don’t raise rates immediately, any sign that they’re prepared to do so this year could lift global yields — and that’s a bonus for the ECB.

Draghi’s pledge to spend 1.7 trillion euros ($1.9 trillion) on quantitative easing through March 2017, and to keep going if needed to revive inflation, faces a key problem: euro-area bond yields are so low that a significant portion of debt is ineligible for purchase under the ECB’s own rules. Fed hawkishness would help ease that constraint, and while the effect might be small, it could buy the Governing Council some time as it considers how to keep the program alive.

“A rate increase would be an expression of confidence,” said Stefan Schneider, chief international economist at Deutsche Bank AG in Frankfurt. “A slight increase in U.S. yields in response would also have an impact on the European bond market. It could help the ECB in increasing the pool of purchasable assets, but I wouldn’t be euphoric.”

via Bloomberg

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