The ECB gives some details on its weapon to limit spreads between sovereign rates -

القائمة الرئيسية


The ECB gives some details on its weapon to limit spreads between sovereign rates -

(BFM Bourse) – The European Central Bank remains determined to fight against inflation, the level of which should remain “excessively high”, warns Christine Lagarde at the opening of the Forum of Central Banks in Sintra. The President of the ECB also gave some indications on the arsenal intended to reduce the gap in yields between the member countries of the euro zone.

The ECB’s anti-fragmentation weapon is gradually being revealed. On the occasion of the Forum of Central Banks in Sintra organized by the European Central Bank, the President of the ECB Christine Lagarde gave some details on the mechanism which should make it possible to avoid a divergence of interest rates between Member States of the euro zone, in other words to limit the “spreads” (or rate differentials) between the German Bund and the other sovereign bonds.

In essence, this new tool currently being developed should make it possible to avoid an excessive widening of interest rate spreads on euro-zone countries, while maintaining pressure on governments to avoid excessive budgetary slippages. “The new instrument must be effective while being proportionate and including sufficient guarantee mechanisms to preserve the momentum of the Member States towards a sound budgetary policy”, explained Christine Lagarde. Preventing the spreads between sovereign borrowing rates is a prerequisite for the proper transmission of monetary policy in all the nineteen countries of the euro zone, she recalled.

Inflationary pressures which are “generalizing”

Returning to the economic context, Christine Lagarde noted that “inflationary pressures are intensifying and spreading in the economy”, while growth is slowing down and that “supply shocks affecting the economy could last longer than intended”. Before adding: “these weaknesses contribute to an uneven transmission of the standardization of our policy according to the jurisdictions”. “The measures aimed at preserving the transmission (of this monetary policy, editor’s note) can be used regardless of the level of rates as long as they are designed in such a way as not to interfere with monetary policy”, she added. underline.

The details of the new “anti-fragmentation” tool will be announced at the next monetary policy meeting of the Governing Council on July 21. According to information from Reuters published before this intervention by Christine Lagarde, the ECB could withdraw liquidity from the banking system in order to offset purchases of sovereign bonds (and thus limit the money supply in circulation to bring down inflation).

The ECB is indeed in a delicate situation: it must increase interest rates to fight against inflation, while avoiding putting States already very indebted in the euro zone in great financial difficulty. To encourage banks to deposit cash with the ECB, the latter could increase the rate of return on money placed by banks with it for certain transactions (to a rate higher than the deposit facility rate), still according to Reuters. This is a so-called “cash absorption” method which was experimented about ten years ago.

First rate increase in July

During this Forum of Central Banks, the European Central Bank also delivered an unsurprising diagnosis, confirming that in terms of prices the risk now was to see their soaring spiral out of control. The ECB will therefore go “as far as necessary” to fight against an “excessively high” price increase which should remain so “for some time to come” in the euro zone, said Christine Lagarde. The president of the European institution recalls the challenge induced “for its monetary policy” of inflation at its highest of 8% in May in the euro zone, which is far from the ECB’s target of 2% in the medium term.

After this exit from Christine Lagarde, the euro regained 0.1% to 1.0586 dollars while the yield of the 10-year Bund, the German benchmark, rose by 6.45% to 1.641% around 12 noon. The French 10-year OAT rose by 4.31% to 2.167%. The Spanish equivalent rose by 2.50% to 2.724% and by 0.91% on the Italian to 3.663%. Approaching mid-session, the CAC 40 accelerated upwards by 1.26% to 6,123.62 points around 12:00 p.m., after closing in the red on Monday evening.

At its monetary policy meeting on June 9, the European Central Bank endorsed the forthcoming cessation of monetary support measures and explicitly announced a 25 basis point (0.25 percentage point) increase in its interest rates. in July, which will mark the first rate hike since May 2011. A rise of half a percentage point in September is not excluded if inflation does not slow down.

This hardening of the ECB’s tone, for the first time in eleven years, had the effect of increasing bond yields and above all the growing divergence in the remuneration demanded by investors between the debt of the most solid countries and those considered financially more fragile. Yields on Italian and Spanish bonds soared to eight-year highs after the ECB’s decision. Worried about the sudden widening of the yields on the debt of the various Member States, the European Central Bank then convened an emergency meeting of the Board of Governors on Wednesday 15 June. The ECB then had the task of reassuring the markets by announcing a new “anti-fragmentation instrument” intended to reduce this difference in yields between the States of the euro zone.

©2022 BFM Bourse