The European Central Bank signalled faster money-printing on Thursday to keep a lid on euro zone borrowing costs but stopped short of adding firepower to its already aggressive pandemic-fighting package.
Concerned that a rise in bond yields could derail a recovery across the 19 countries that share the euro, the ECB said it would use its 1.85 trillion Pandemic Emergency Purchase Programme more generously over the coming months to stop any unwarranted rise in debt financing costs.
"The Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year," the ECB said in a statement after its regular policy meeting.
The widely expected move comes after a steady rise in yields since the start of the year that has mostly mirrored a similar move in U.S. Treasuries rather than reflecting improved economic prospects across the euro zone.
Growth is actually weaker than forecast as a new wave of the coronavirus pandemic and a painfully slow vaccine rollout are requiring longer lockdowns, challenging expectations for a rapid rebound in the spring.
The bloc's fiscal support is also modest compared to the $1.9 trillion relief package approved by the United States Congress.
"The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions," the ECB said.
But it also maintained its previous guidance that its PEPP quota will not necessarily be used in full, if market conditions allow.
ECB President Christine Lagarde will explain the bank's policy decision and unveil fresh economic projections at a 1330 GMT news conference.
For the ECB, the trick will be implementing its renewed commitment to favourable financing conditions.
It cannot appear to micro-manage bond yields, since that would tie its hands in the future and invite accusations it is shielding governments from market forces.
Policymakers are also careful not to overstate the rise in yields, which are still low by most standards. The German yield curve, the benchmark for the 19-country bloc, still in negative territory up to 20 years.
German 10-year yields are only about 30 basis points higher since the start of the year and spreads between German and peripheral bonds are broadly steady.
But the ECB also needs to reassure investors, who have started to doubt its commitment after bond purchase volumes actually decreased in the last two weeks, confounding expectations it will use its much-emphasised "flexibility" to run up market activity.
Firepower will not be an issue, as the bank still has a 1 trillion euro quota to buy bonds through next March, so the question is how the ECB will use its flexibility.
Another hurdle for Lagarde will be to explain what specific measures the bank will look at when guiding markets. ECB chief economist Philip Lane pointed to the GDP-weighted sovereign yield curve and overnight indexed swaps but other policymakers specified different measures.
With Thursday's decision, the ECB's key rate is expected to stay at a record low -0.5%. The total envelope for the Pandemic Emergency Purchase Programme is also seen unchanged at 1.85 trillion euros.