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Economy4 hours ago (Feb 25, 2021 02:50AM ET)

© Reuters. FILE PHOTO: 29th Frankfurt European Banking Congress (EBC) takes place in Frankfurt

FRANKFURT (Reuters) – The European Central Bank will fight any big increase in real or inflation-adjusted interest rates as it could choke off the bloc’s economic recovery, ECB board member Isabel Schnabel told Latvian news agency LETA.

Borrowing costs have risen across many key markets this year, driven in part by rising U.S. Treasury yields and expectations for higher inflation, prompting ECB chief Christine Lagarde earlier this week to express concern.

But Lagarde warned about the rise of nominal yields while Schnabel pointed to real rates, two indicators that have diverged somewhat as inflation is picking up quicker than earlier forecast.

“We will ensure that there is no unwarranted tightening of financing conditions,” Schnabel, the head of the ECB’s market operations, told LETA in an interview.

“A too abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery,” she said. “Therefore, we are monitoring financial market developments closely.”

Real yields have barely risen at the short end of the yield curve as inflation has been surprisingly strong this year, suggesting potential upside in projections.

Even the move in nominal yields has been rather moderate, with 10-year German Bunds now yielding -0.293% as against -0.575% at the start of the year.

Schnabel added that while economic growth in the first quarter could fall short of the ECB’s expectation due to extended lockdowns, the full-year figure was still seen in the “same ballpark” as earlier.

“Based on our current projections, the euro area economy should be back at its pre-crisis level by mid-2022,” she said.

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