The European Central Bank It announced Wednesday that it plans to create a new tool to tackle the risks of a euro zone fragmentation, in a move aimed at allaying fears of a new debt crisis.
The decision comes after the central bank surprised market participants with an emergency meeting to address the high borrowing costs of many European governments.
“Since the gradual process of policy normalization began in December 2021, the Governing Council has pledged to act against renewed retail risks,” the European Central Bank said in a statement.
“The pandemic has left permanent weaknesses in the eurozone economy that are already contributing to the uneven transition of our monetary policy normalization across jurisdictions,” she added.
The comments reflect the recent rise in bond yields over the past week or so. After last week’s regular policy meeting, the European Central Bank proposed tighter policy tightening but failed to introduce any new measures to support the heavily indebted nations in the bloc.
Christine Lagarde, President of the European Central Bank. The central bank set an emergency meeting to address the high bond yields.
John Theiss | Afp | Getty Images
This raised some tension among money managers over financial fragmentation and led to higher bond yields.
To address these concerns, the European Central Bank said on Wednesday that it will reinvest recoveries from the Emergency Bond Purchase Program – referred to as PEPP – in a flexible manner and will ask its team to “accelerate the finalization of the design of a new anti-fragmentation tool”.
“Our commitment to The euro is our anti-fragmentation tool. This commitment has no limits. Our track record of intervening when needed supports this commitment.”
European countries faced materially high borrowing costs in the wake of the sovereign debt crisis in 2011. Some of the imbalances have been addressed, but concerns remain about the region as a whole, particularly because it has a single monetary policy for 19 different financial locations.
return on Italian 10-year bonds It traded lower on Wednesday morning, shortly after the European Central Bank announced its unscheduled meeting. The yield extended its losses during afternoon trades to trade below the 4% level.
Borrowing costs for other eurozone governments also fell on the news, with Greece’s 10-year bond yield trading down more than 7%.
In the currency markets, the euro rose against the US dollar, continuing the trend seen earlier in the session when news broke of an emergency meeting.
Italian bank shares, which rose earlier Wednesday, continued their rally after the monetary policy decision.
The decision “was not enough,” Jack Allen-Reynolds, chief European economist at Capital Economics, said in a note.
“The flexible reinvestment of Pakistan Environmental Protection Program (PEPP) may buy policy makers a little time, but the new ‘anti-fragmentation tool’ the bank is working on will need more progress,” he said. “And there is no guarantee that they will reach consensus on such an instrument at the next policy meeting in July, so we could see spreads widen further before a new instrument is implemented.”
Mario Centeno, a member of the European Central Bank’s Governing Council, said a faster normalization of monetary policy is a risk that cannot be ruled out, according to Reuters. The central bank added that the pace of interest rate hikes would be “gradual”.