The European Central Bank announced larger purchases of bonds, which is good for us because borrowing will be more favorable, and new investments will be higher.
The major world banks are preventing the growth of the price of capital, so money will still remain cheap, that is, interest rates on borrowing will be low in the future. This is especially true for the European Central Bank (ECB), whose policy concerns us the most, because it announced an increase in the purchase of bonds in the coming months a few days ago.
According to experts, this is a step aimed at preventing the observed premature growth of borrowing costs in the 19-member monetary bloc. ECB officials have expressed concern about the increase in yields on long-term debt securities, assessing it as an overflow of influence from the United States, which expects a faster economic recovery.
The eurozone is still in a double recession and economists believe it is not ready for rising borrowing costs. Yields on long-term government bonds have risen in the eurozone by about 0.3 percent since the beginning of the year. That’s not much, but the ECB wants to avoid any premature tightening of lending conditions while businesses are still struggling with blockades imposed to curb the spread of the coronavirus.
The purchase of bonds from the central bank affects the reduction of bond yields, which are used as a benchmark for setting borrowing prices across the region.
Thus, a stronger pace of bond buying should in theory help make loans cheap for companies that need to invest or borrow in order to survive the pandemic.
Milojko Arsic, a professor at the Faculty of Economics in Belgrade, says that such application of stimulating measures of monetary and fiscal policy is justified until the end of the pandemic and the beginning of economic growth at the usual rate. This means that it is necessary to apply these stimulative measures throughout this year.
“However, that also carries a certain risk – that inflation will accelerate in the next two or three years. I think that is an acceptable price for a possible deeper recession that would happen this year. The ultimate goal of the measures is to encourage consumption and investment – for citizens to spend as much as possible for current and permanent needs, and for companies to invest as much as possible. Such a policy works in our favor because the large offer of cheap money affects the more favorable conditions for Serbia’s borrowing, as well as the increase in investments. When they get cheap loans in the EU, they can place a part of that money with us,” says Arsic.
Branko Urosevic, also a professor at the same faculty, says that the ECB continues with the policy of quantitative easing, because economic growth in the EU is in question. At the same time, Germany, as the strongest economy, is not showing excessive signs of recovery.
“The ECB is pumping up liquidity because it has noticed that banks do not borrow, and cheap money does not end up in stores, ie in consumption. Since the money is practically free, banks can place it in risky securities,” says Urosevic.
The ECB’s decision indicates that the eurozone is lagging behind other major economies when it comes to recovery. China is the only large economy that recorded growth last year, and the United States is expected to reach pre-pandemic levels by the middle of this year. In contrast, the recovery of the eurozone economy is expected only in the middle of 2022 due to the slower vaccination campaign and lower levels of government spending compared to the United States.
GDP in January minus one percent
In January, Serbia’s GDP fell by one percent, and prof. Milojko Arsic says that this is not surprising, because in the entire first quarter of last year, economic growth was high. That is why he previously predicted that in the first quarter, economic growth will be in the red or around zero.
Some activities still work poorly, such as tourism and catering, as epidemiological restrictions have been tightened. It can be a signal to the government to create economic policy as if economic growth will be lower – instead of six, four to five percent, Politika reports.
