The European Central Bank (ECB) accelerated the elaboration of a new tool to combat increases in eurozone bond yieldsat a time when the markets are under stress with the prospect of the first interest rate hikes in more than a decade.
After a emergency meeting held on Wednesday, convened after the Italian yields hit their highest level since the debt crisis European sovereign, the Governing Council said it had instructed the committees to create a new instrument to deal with so-called fragmentation. Also, will make reinvestment of ransoms more flexible that expire in the portfolio of bonuses you accumulated during the pandemicwith a view to preserving the functioning of the monetary policy transmission mechanism.
The ECB surprised with an unscheduled meeting to discuss a market environment that has deteriorated notably
“The pandemic has left lasting vulnerabilities in the eurozone economy which, in fact, are contributing to the uneven transmission of the normalization of our monetary policy in the different jurisdictions,” the ECB said in a statement reproduced by Bloomberg.
Italian bonds pared their biggest advance in more than two years, with 10-year yields trading 32 basis points lower at 3.86%, compared with 3.76% before the statement was released. . The euro erased most of its gains against the dollar, trailing 0.1% higher at $1.04291.
Before the threat of a repeat of the debt crisis that nearly brought down the single currency a decade agothe ECB said it will be flexible in reinvesting maturing cash from its 1.7 trillion euro ($1.8 trillion) pandemic support plan, which recently ended, and that it will consider a new instrument that should be devised by your staff.
The ECB took the initiative to avoid a new debt crisis in the countries of southern Europe, which threatened the continuity of the euro more than a decade ago
The ECB surprised the markets on Wednesday by holding a unscheduled meeting to discuss a market environment that has deteriorated markedly since plans were outlined last week to start raising borrowing costs from record lows.
Investors are not convinced that officials can raise borrowing costs to combat unprecedented inflation in the eurozone and at the same time keep yields under control among the most indebted members of the bloc. The 75 basis point interest rate hike by the Federal Reserve this day could increase the nervousness.
“I see today’s statement as the minimum of what could be expected, but also the most realistic result,” he told Bloomberg Peter Christiansen, chief strategist at Danske Bank. “With the ECB’s assignment to the committees, they have sent a signal that they are fully committed to guaranteeing the functioning of the transmission of monetary policy. However, they have also bought some time. We probably won’t hear from the committees until the July or September meeting,” he added.
A different tool to deal with market stress would open a new chapter in the ECB’s acrimonious relationship with bond markets since the indebted Greece first succumbed to turmoil more than a decade ago.
Due to the effect of the pandemic, the debt of the central countries increased, while the prices of bonds fell sharply
That crisis was finally brought under control by the president of the ECB, mario draghi, with the creation of the OMT program, part of its promise to do “whatever it takes” to preserve the euro. Meanwhile, market stress at the onset of the pandemic was addressed with another emergency bond-buying program.
Officials have repeatedly repeated recently that they are willing to come up with new instruments as needed, but have disappointed markets with a lack of detail on their plans.
Isabella Schnabela member of the Executive Committee and head of the ECB’s market operations, noted that any response to the bond market panic will come when necessary and will depend on the specific situation facing officials.
However, he promised that the ECB will not tolerate “changes in financing conditions that go beyond fundamental factors and that threaten the transmission of monetary policy”, saying that the commitment to avoid fragmentation “is limitless”.
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