(Bloomberg) — European Central Bank Governing Council member Ewald Nowotny said negative bond yields in the euro area probably aren’t here to stay.
“If we enter a more normal phase of inflation expectations, that will also be reflected in yields,” the Austrian central-bank governor said in an interview in Frankfurt on Wednesday. “I don’t think one can assume that we will have a very long phase of negative yields if this program is successful.”
Unlike earlier programs by the U.S. Federal Reserve and Bank of England, the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing (QE) plan that started on March 9 must deal with a market where a large share of bonds have negative yields. That exposes the national central banks to losses, a fact that Nowotny said threatens to damage their reputations.
“There is an inherent risk of future losses if we buy at negative yields, so basically, one would like to avoid those future losses by buying longer maturities,” Nowotny said. “Engaging in foreseeable losses is something that may come with a reputational risk for central banks.”
German 10-year bonds pared gains after the comments were published. The yield stood at 0.21 percent at 2:34 p.m. Frankfurt time after reaching 0.198 percent earlier, the lowest level since Bloomberg began collecting the data in 1989.
“We maintain our call that the negative-yield environment will not last,” said Markus Allenspach, head of fixed-income research at Julius Baer Group Ltd. “The more the ECB is successful in restoring the long-term inflation expectations, the more massive the correction will come at some point in foreseeable future.”
ECB President Mario Draghi has already pointed to an improvement in market-based gauges of future price developments, while the inflation rate in the single-currency region was less negative in February than economists anticipated.
Nowotny said inflation will start to normalize in the second half of the year. The ECB’s latest macroeconomic projections foresee consumer prices flat in 2015, with average inflation of 1.5 percent next year and 1.8 percent in 2017.