UPDATE 2-ECB barely upped stimulus last week despite market turbulence

* Gross PEPP purchases coming in below weekly average

* Mixed messages from council members about need to rein in yields

* Lagarde may say more after ECB Governing Council meets Thursday

* ECB overview page here (Adds detail, context)

FRANKFURT, March 9 (Reuters) – The European Central Bank barely increased its emergency bond purchases last week, according to data issued on Tuesday, stoking doubts about the ECB’s resolve to calm market nerves and support indebted governments through the pandemic.

Investors have been testing the ECB’s resolve to rein in borrowing costs on the bond market since yields started rising last month, mostly driven by the prospect of higher inflation in the United States.

But so far the euro zone’s central bank has refrained from large-scale market intervention, and policymakers are divided on whether one is warranted ahead of their meeting on Thursday.

In the five days to March 5, the ECB bought 18.2 billion euros’ worth of bonds on a gross basis – before taking out redemptions – under its Pandemic Emergency Purchase Programme.

This was a 7.7% increase over the week before, but still less than the average since the programme started, raising fresh questions for ECB President Christine Lagarde to answer at her news conference on Thursday.

“The data makes life a little easier for Lagarde but still leaves a lot of questions as to the lack of pickup in PEPP purchase pace despite the step-up in verbal intervention,” said Stephen Bough, a senior analyst at IFR.

The main issue is that the ECB’s message on bond yields has been ambiguous.

Dovish rate-setters, such as Greek Central Bank Governor Yannis Stournaras and Italian board member Fabio Panetta, have argued that the rise in yields is unwarranted and jeopardising the euro zone’s recovery.

But other members of the Governing Council, which comprises six board members plus the governors of the euro zone’s 19 national central banks, including Bundesbank President Jens Weidmann, have been more cautious.

German board member Isabel Schnabel has even said that a rise in yields could be welcome if it reflects improved growth prospects.

This suggests that the ECB’s board, which sets the regular purchase targets for PEPP and the ECB’s other programmes, is probably awaiting guidance from the full Governing Council on Thursday.

NEGATIVE REAL YIELDS

After all, the ECB can still afford to wait.

A year ago, a surge in borrowing costs for Italy and Spain threatened to make their financing needs unsustainable.

But now, euro zone countries are able to borrow for several years at yields well below the rate of inflation, while less indebted governments such as Germany’s are being paid to borrow via negative yields.

Italy’s 10-year bond yields stood at 0.7% on Tuesday compared to 3% at one point in March 2020.

In addition, Lagarde could argue the ECB is underpinning the bond market through its other programmes.

On top of PEPP, the ECB scooped up 7.2 billion euros in public sector bonds under a different scheme, though large redemptions offset most of these other purchases.

The ECB has insisted that smaller-than-expected net purchases in the past two weeks were due to many bonds maturing and leaving its balance sheet.

But redemptions could not fully explain the lack of pick up in PEPP, which has now come in below its weekly average gross size of 19.7 billion euros for almost a month.

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