The institution promised Wednesday to show “flexibility” in its monetary policy, after an exceptional meeting of its Board of Governors.
The European Central Bank (ECB) promised on Wednesday to show “flexibility” in its monetary policy to calm the tensions that have recently appeared on borrowing rates, in Italy in particular, while the pandemic has “left lasting vulnerabilitiesin the euro zone. The institute “will apply some flexibility in the reinvestmentbonds held under its emergency program launched during the pandemic (PEPP), it announced after an exceptional meeting of its Board of Governors.
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The ECB has also instructed its teamsto speed up“the design of a new instrument”anti-fragmentation» to fight against an excessive spread of interest rates between Northern and Southern countries of the euro zone. No details on the content of this instrument or its timetable for adoption have been given.
The institution will give itself flexibility in the management of the stock of debt held under the “PEPP“, this huge debt buyback program operated from March 2020 to last March in the midst of a pandemic, i.e. an amount of around 1,800 billion euros. The ECB could, for example, reinvest more repayments of maturing loans for fragile countries, such as Italy, and less reinvest in matured German securities, whose borrowing conditions are the most favorable on the market.
The objective of inflation at 2%
It is important for the ECB topreserve the functioning of the monetary policy transmission mechanism“, which is seized up when the countries of the euro zone borrow on conditions that are too different. The ultimate objective is to bring inflation back to the desired level of 2%, while the aggregate peaked at more than 8% in May in the euro zone.
The rapid rise in risk premiums on Italian bonds led the ECB to hold this exceptional meeting online, its president Christine Lagarde leading the discussions from London, from where she will speak at the end of the afternoon. With this communication, the ECB said “what the markets needed to hear, finally!tweeted Frederik Ducrozet, Chief Economist at Pictet Weath Management.
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The institute also met on the eve of a meeting of economy and finance ministers of the euro zone (Eurogroup) in Luxembourg. The ECB, which is participating in this meeting, will have toensure that this future (anti-fragmentation) tool will receive the maximum necessary political and legal supportcommented Stanislas Jourdan, from Positive Money Europe.