The European Central Bank (ECB) will take action to contain the turmoil in European debt markets. After an emergency meeting on Wednesday, the monetary authorities announced that they would be buying debt more flexibly and would also accelerate the implementation of a new “anti-fragmentation” tool.
“The Governing Council has decided that it will be flexible in reinvesting the expected repayments of the PEPP portfolio in order to keep the monetary policy transmission mechanism functioning, which is a precondition for the ECB to fulfill its mandate. price stability,” the central bank said in a statement.
In a Pandemic Emergency Procurement Program (PEPP) envelope 1.85 billion euros to buy eurozone public and private debt to try to stop the impact of the pandemic on the economy. Net purchases ended in March and the reinvestment phase of maturing amounts continues. These are values that the ECB now wants to use purposefully.
Along with this policy measure, they also decided to “authorize the relevant committees of the Eurosystem, together with the services of the ECB, to expedite the completion of the development of a new anti-fragmentation instrument for consideration by the Governing Council.”
The ECB’s announcement comes at a time when markets are in turmoil, with investors seeing a general sell-off in major global markets and large increases in interest rates on sovereign debt in the euro area.
As the central bank itself acknowledges, in a statement released this Wednesday, The pandemic has left persistent vulnerabilities in the eurozone economy that are actually contributing to the uneven transfer of our monetary policy normalization across different jurisdictions.”
As such, “as the gradual process of monetary policy normalization began in December 2021, the Governing Council has committed itself to acting against the risks of renewed fragmentation.”
In press conferences following the ECB’s last two meetings, one in April and the other last week, monetary authority president Christine Lagarde has already stressed that “the ECB has the tools to fight fragmentation and will introduce new tools if necessary.” , emphasizing also the need for flexibility when the time calls for it.
Faced with reporters in April on rising eurozone prices and yields, the ECB president already recalled that “flexibility has served us well” in the past and provided new tools to contain the impact of escalating inflation and deteriorating interest rates on debt were among the options for monetary authorities. .
At the latest policy meeting, the ECB pointed to a 25 basis point hike in interest rates as early as July and opened the door for more growth in September, also confirming regular acquisition program (APP) net purchases end in July.
After the monetary authorities released this statement, interest rates on sovereign debt in the euro area fell significantly, and major European markets strengthened.
Germany’s 10-year bond yield, the region’s benchmark, is subtracted 13.6 basis points to 1.609%. Interest on Italian debt with the same maturity recorded one of the largest declines in the eurozone, falling 36 basis points to 3.804%, trailing only the yield on Greek debt, which fell 42 points to 4.248%. In turn, the 10-year Portuguese debt yield follows this trend and declines by 24.7 basis points to 2.844%, the biggest drop since March this year.
In the stock market, the main European markets gained strength, with the exception of Lisbon, which account for more than 1%. The European benchmark Stoxx 600 added 1.20%, the Spanish IBEX added 1.24% and the German DAX added 1.25%. London rose by 1.20%, Amsterdam by 1.25% and Milan by 2.38%. The PSI value is only 0.67%.
(News updated at 14:04 to reflect market reaction).