ECB calls surprise meeting as borrowing costs rise

Published on: Amended:

Frankfurt (AFP) – Policymakers at the European Central Bank called an emergency meeting on Wednesday as more indebted eurozone states come under pressure from rising borrowing costs.

A week after a regular meeting, the Governing Council will hold an “ad hoc meeting” to discuss “current market conditions”, an ECB spokesman said.

The ECB drew a line under years of ultra-loose monetary policy at last week’s meeting, calling for an end to its massive stimulus program through bond buying in early July.

Under pressure from soaring eurozone inflation, the ECB also announced its first scheduled interest rate hike in more than a decade for the same month.

Consumer prices rose at an 8.1% pace in May, an all-time high for the currency club and well above the ECB’s 2% target.

The change in central bank policy has raised the specter of “fragmentation” in the eurozone, where borrowing costs for some more indebted members are rising faster than for others.

Following last week’s meeting, the so-called spread between Italian 10-year bond yields and those of Germany – seen as a benchmark for stability – has widened further, reaching levels not seen since the very beginning. of the pandemic in 2020.

Yields on Italian 10-year bonds fell following the announcement of the ECB meeting, narrowing the gap with German government debt.

Eurozone stock markets also rose after falling this week ahead of a regular U.S. Federal Reserve meeting at which policymakers could raise rates even higher than expected to tackle decades-high inflation.

Speaking at an event in Paris on Tuesday, ECB executive board member Isabel Schnabel said the bank “would not tolerate” unjustified increases in borrowing costs that would “undermine” the bank’s policy.

Schnabel said the ECB’s response to fragmentation risks “would depend on the situation we face”, but insisted the bank’s commitment had “no limits”.

“There is no doubt that, if and when necessary, we can and will design and deploy new instruments to secure the transmission of monetary policy and therefore our primary mandate of price stability,” she said. .

‘Flexibility’

The ECB was ready to respond at “very short notice” if needed, Schnabel said.

“In this case, reinvestments of maturing securities under the PEPP can be adjusted flexibly over time,” she said.

The PEPP is the ECB’s pandemic-era stimulus package to boost economic growth and maintain credit in the 19-nation currency club.

The ECB ended net purchases under the 1.85 trillion euro ($1.94 trillion) program in March this year.

Another option would be to design a new “tool”, Schnabel said, although its scope would depend on “the situation we are facing”.

Schnabel is just the latest senior ECB official to talk about the risks of rising spreads.

President Christine Lagarde said the ECB would show “flexibility” in response to pressure on borrowing costs at the ECB’s regular meeting last week in Amsterdam.

‘Flexibility’

“Some spread widening amid an overall rise in yields is normal,” said Holger Schmieding, chief economist at Berenberg Bank.

“As long as it remains consistent with the inflation backdrop and the pace of nominal growth, it should not present imminent risk, even for fiscally-struggling Italy,” Schmieding said.

Policymakers will meet to discuss market developments from 11:00 a.m. Frankfurt time (0900) GMT.

Normally, members of the Governing Council meet about every six weeks to set the course for the ECB, with their next regular meeting scheduled for July 21.

Comments are closed.