Saturday, July 2, 2022

ECB’s pledge underscores commitment to contain bond-market panic

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According to Governing Council member Oli Rehn, the European Central Bank intends to ensure that its monetary policy is channeled evenly across the euro area’s 19 member-states by preventing undue turbulence on government bond markets.

“We are strongly committed to preventing undue fragmentation that will affect monetary-policy transmission,” Rehn told a panel Saturday that he “on behalf of” said a panel convened by the Federal Reserve Bank of Dallas. speaking as a member of the Governing Council.” ,

At the same time, Rehn – a moderate on the interest-rate-setting panel – addressed concerns that aiding nations grappling with large debt burdens equated their governments to funding. “We are fully committed to preventing fiscal dominance – and/or fiscal dominance for that matter,” he said.

Rehan spoke days after ECB officials intensified work on a tool to deal with potentially unfair deviations in the bonds of euro-area governments. The Governing Council held an emergency meeting on Wednesday amid a spurt in Italian yields. It is preparing to raise interest rates for the first time in more than a decade to curb record inflation.

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The announcement of a new instrument has calmed the markets somewhat. But investors are eager to hear the details of the new instrument and the key now will be how quickly it can be delivered and how reliable it is.

For now, officials can lean on a reinvestment of mature debt from the ECB’s pandemic-era bond-buying program, which could be redirected to support struggling countries. The flexibility in asset purchases has “helped us counteract any impaired transmission of monetary policy” and “will remain firmly in our policy toolbox,” Rehn said.

What’s more, “in case of more profound structural economic vulnerabilities and debt-stability problems, there is always the option of activating one-time monetary transactions, which will precede a program of the European Stability Mechanism,” he said, referring to a The tool, designed a decade ago as ex-ECB chairman Mario Draghi, pledges to do “whatever it takes” to save the euro. It was never used.

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Meanwhile, the plan to raise rates next month remains intact. According to Rehn, the head of Finland’s central bank, the ECB is “likely to be able to exit negative territory in interest rates by the end of the third quarter”.

“Trust me we have both the tools and – at least equally important – the firm wants to ensure that euro-zone inflation remains stable at its 2% target in the medium term,” he said. “Monetary policy may not do much about rising energy prices, but it may influence inflation expectations to remain stable around the target.”

Asked about the risk of a slowdown during a question and answer session, Rehan said it can be stopped but will require clever action by the authorities.

“I think we have a chance to avoid a recession in the euro area,” he said. “The way to do this is with a very calibrated normalization of monetary policy.”

(Updated with Rehan remarks during the Q&A session in the last paragraph.)

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