The European Central Bank will strengthen its commitment this week to target vulnerable debt markets in eurozone countries if they are affected by a liquidation, as policymakers prepare to raise rates for the first time in more than a decade.
A majority of the 25 members of the governing council are expected to support a proposal to create a new bond-buying program if necessary to offset the costs of borrowing for member states, such as Italy, which are out of control, according to several people. involved in the discussions.
Even without a new scheme, the ECB already has an additional € 200 billion to spend on stressful public debt purchases under its existing bond purchase program. This 200 billion euros would advance the reinvestment of overdue assets by up to one year.
Rate-fixers, who meet in Amsterdam on Wednesday and Thursday, are likely to clash over when to stop buying better ones. Some plan to call for a halt to shopping as early as Thursday, several weeks ahead of schedule, although they admit that only a minority can support the idea.
The bank is under pressure to react to record inflation, but has lagged behind its US and UK counterparts in tightening monetary policy. Many of the council’s hawks have agreed that they will need to give more support to bond markets to pave the way for them to be more aggressive in raising rates.
Almost all members of the City Council agree that the ultra-flow monetary policy that has been in place for more than a decade must end. An increase of at least 25 basis points is almost certain to take place at the next ECB policy meeting on 21 July. The deposit rate is now less than 0.5 percent.
Citizens of the region are facing a rising cost of living, exacerbated by the Russian invasion of Ukraine. Consumer prices in the eurozone rose 8.1% during the year to May, quadrupling the ECB’s 2% target and doubling the previous high since the single currency was launched in 1999, forcing governments to pay subsidies to cushion the impact of increased energy and food. home prices.
However, some are concerned about the market consequences of rising interest rates and want a stronger commitment to launch a new bond-buying scheme to offset any unjustified increase in borrowing costs in heavily indebted countries.
ECB President Christine Lagarde said in a blog post last month: “If necessary, we can design and deploy new instruments to ensure the transmission of monetary policy as we move forward on the path of policy normalization, as we have demonstrated many times in the past. “
Several board members said they would support adding similar language to their statement Thursday, based on a promise made after their April meeting to maintain flexibility when targeting price stability. is threatened “under stress”.
The gap between 10-year bond yields in Germany and Italy, a closely watched indicator of financial stress in the eurozone, rose last week to its highest level since a sale in southern European bond markets at the start of the pandemic last year. 2020.
The central bank said earlier that its € 20 billion a month asset purchase program would not end until early July and would only consider raising interest rates “some time” later.
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Politicians planning to call for an immediate end to additional bond purchases this week believe there is no longer any justification for continuing a policy designed to raise inflation. Others insisted it was more credible to keep the bond purchase plan to continue until early July. The ECB declined to comment.
Carsten Brzeski, ING’s head of macro research, said that advancing the end of bond purchases by a few weeks would be “a clear malicious surprise” and could even open the door to the possibility of raising interest rates. interest before the July 21 meeting.
The ECB has bought more than 4.9 billion euros in bonds in total, equivalent to more than a third of the eurozone’s gross domestic product, since launching its quantitative easing program to deal with the double threat of deflation and the sovereign debt crisis in 2014.
Over the past two years, it has bought more than all the additional bonds issued by the 19 eurozone governments, which has given it a huge influence on borrowing costs in the region.
The ECB has also been slower to stop buying better than most Western central banks. Some, such as the US Federal Reserve, have even begun to reduce their balance sheets by not reinvesting the proceeds of overdue bonds.