Unrest on the markets alarms ECB – special meeting
Wave of sell-offs on the bond markets, share price losses – the latest developments on the markets are worrying Europe’s currency watchdogs. The Governing Council will discuss the situation at a special meeting.
Europe’s currency watchdogs are bracing themselves against the recent unrest on the financial markets. The Governing Council of the ECB met on Wednesday for a special meeting called at short notice “to discuss the current market situation”, as a spokeswoman for the European Central Bank (ECB) in Frankfurt said on request.
The spokeswoman confirmed the corresponding media reports. The announcement of the “ad hoc meeting” gave wings to the euro and calmed the stock markets somewhat.
The day before, ECB Executive Board member Isabel Schnabel had already made it clear in a speech that the central bank would not accept a disorderly increase in the financing costs of more heavily indebted countries in the euro area: “We will not tolerate any changes in financing conditions that go beyond the fundamental factors and the transfer jeopardize monetary policy.”
interest rates increased
In the past few days, interest rates on the capital markets had risen sharply, while sentiment on the stock markets had deteriorated significantly. Analysts cited the US Federal Reserve’s tighter monetary policy as the main reason, but also the prospect of interest rate hikes by the ECB.
At its most recent regular meeting last Thursday, the Governing Council decided, after much hesitation, to exit its ultra-loose monetary policy for years in view of the record high inflation: the multi-billion dollar bond purchases will end on July 1st. At the next regular meeting of the ECB Council on July 21, the central bank intends to raise key interest rates for the first time in eleven years, initially by 0.25 percentage points each time.
Fresh money becomes more expensive
Capital market interest rates in southern European countries had risen particularly sharply in the past few days. In Italy, the interest rate for ten-year government bonds climbed back above the four percent mark. At the end of March it was only half as high.
The yield gap – the spread – between government bonds from Germany and those of more heavily indebted euro countries, especially Italy, has widened recently. This means that it will be more expensive for countries like Italy to get fresh money on the market because they have to offer investors higher interest rates again. This could become a problem for such states in view of the already enormous mountains of debt.
One reason for the latest development is the ECB’s announcement that it would stop buying new government bonds at the beginning of July. The ECB wants to reinvest funds from expiring securities for a longer period of time. But with the end of the purchases, the central bank is helping the states to a much lesser extent than in previous years by buying bonds.
It is conceivable that the ECB will pay more attention to certain countries when reinvesting funds from expiring bonds. On Tuesday, ECB Executive Board member Schnabel referred to the central bank’s decision from December, according to which funds from the Corona emergency purchase program PEPP, which expired at the end of March, can be used again in a particularly flexible manner.
If necessary, new instruments
The ECB has made it clear “that within the framework of our mandate, flexibility will remain an element of monetary policy under tense conditions,” said Schnabel. This commitment could “be put into practice within a very short period of time” should the ECB come to the conclusion that the transmission of its monetary policy was at risk. “In this case, the reinvestments from maturing securities under the PEPP can be adjusted flexibly over time, asset classes and countries,” said Schnabel. According to current planning, the ECB intends to reinvest the repayment amounts from the securities purchased under the PEPP program at least until the end of 2024 when they mature.
Schnabel also reiterated earlier comments by ECB President Christine Lagarde that the central bank would also develop new tools, if necessary, to ensure that its monetary policy achieves the main goal of stable prices with a medium-term inflation rate of two percent. The commitment to the euro is the central bank’s tool against fragmentation in the currency area of the 19 countries, said Schnabel: “This commitment has no limits.”
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