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The European Central Bank has said it expects to increase its bond purchases “significantly” next quarter, after borrowing costs rose in the region.

The ECB opted on Thursday to leave its Pandemic Emergency Purchase Program, or PEPP, unchanged, at a total of 1.85 trillion euros ($2.21 trillion) due to last until March 2022.

However, the central bank’s bond purchases in the first quarter have been lower than usual and the Frankfurt-based institution said it expected to ramp up its purchases going forward.

“Based on a joint assessment of financing conditions and the inflation outlook, 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.

Bond yields in the euro zone have been rising since February, following their United States counterparts higher after President Joe Biden announced a massive fiscal stimulus plan. It has led to fears that rising yields could derail the economic recovery in Europe by raising borrowing costs for countries already struggling with the coronavirus crisis.

Economic outlook

Back in December, the ECB forecast that gross domestic product (GDP) in the euro zone would rise by 3.9% this year and 4.2% in 2022. In its latest estimates out on Thursday, the ECB revised its GDP for 2021 to 4% and to 4.1% for 2022.

“Looking ahead, the ongoing vaccination campaigns, together with the gradual relaxation of containment measures – barring any further adverse developments related to the pandemic – underpin the expectation of a firm rebound in economic activity in the course of 2021,” Lagarde said.

However, she noted that the ongoing pandemic continues to pose a risk to the economy and added that consumers remain cautious about the outlook.

“Overall, the risks surrounding the euro area growth outlook over the medium term have become more balanced,” Lagarde said, mentioning vaccination campaigns, fiscal stimulus and better prospects for global demand.

On Thursday, Lagarde spoke about “the importance of (these funds) becoming operational without delay.”

In terms of inflation, the ECB expects some volatility in the coming months.

The ECB estimates an inflation rate of 1.5% in 2021 and of 1.2% in 2022. The ECB’s mandate is to keep prices lower but close to 2% over the medium term.

Market reaction

Euro zone banks experienced a sell-off on the back of the ECB’s comments. The sector fell more than 1% shortly after the central bank issued its latest decision.

The dovish stance of the central bank could mean that lenders in the region will continue to struggle in the low interest rate environment.

Reference: CNBC