Europe has Passed Turning Point but still Needs ECB Support


Recent yield rise due to improved outlook Schnabel

Financing conditions still favourable

Size of PEPP envelope not constraining ECB

ECB policy to stay easy even after PEPP

By Balazs Koranyi, Francesco Canepa and Frank Siebelt

FRANKFURT, May 28 Reuters The euro zone economy has reached a turning point and the recent rise in borrowing costs reflects improved fundamentals, European Central Bank board member Isabel Schnabel told Reuters, playing down concerns that rising yields risk choking off growth.

Facing a persistent uptick in borrowing costs, the ECB must decide on the future pace of its emergency bond buys at a June 10 meeting and a growing chorus of policymakers is calling for a steady flow of stimulus, fearing that the recovery might otherwise falter.

Schnabel, the head of the ECBs market operations, took a benign view of the rise in nominal yields, however, arguing that it was expected and that financing conditions remain favourable, in line with the banks December commitment.

Rising yields are a natural development at a turning point in the recovery investors become more optimistic, inflation expectations rise and, as a result, nominal yields go up, Schnabel told Reuters in an interview. This is precisely what we would expect and what we want to see.

Financing conditions remain favourable, she argued, noting that real or inflationadjusted rates are broadly stable.

Now emerging from a doubledip recession, the euro zone economy is set to grow more…

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