The leadership of the ECB meets for the emergency meeting

D.The monetary authorities of the European Central Bank (ECB) will hold an extraordinary board meeting on Wednesday to discuss the fallout from the recent sell-off in the bond market. “The Governing Council will hold an ad hoc meeting on Wednesday to discuss current market conditions,” a spokesman for the euro central bank said Wednesday. According to several insiders, the meeting is scheduled for 11:00. However, it is still unclear whether a message will be posted.

Some board members, who were actually expected at an event in Milan this Wednesday, had their trip canceled due to the board meeting. Following the news, the euro was up 0.7% to $ 1.049. By contrast, the yield on 10-year Italian government bonds fell by nearly 30 basis points to 3.874%. The Dax increased up to 1.3% to 13,481 points. The sell-off in the equity and bond markets of the previous days was also triggered by the monetary policy meeting of the US Federal Reserve, which will announce its interest rate decision Wednesday evening.

Given the high inflation rate of 8.6 percent in May, economists now even expect interest rates to rise by 0.75 percentage points, having previously assumed half a percentage point. Bond yields rose sharply after the ECB announced a series of rate hikes on Thursday. The 10-year government bond yield this week crossed the 4% mark for the first time since 2014.

The difference in yield (spread) between German government bonds and those of the most heavily indebted southern euro countries, in particular Italy, had risen to the highest level in the last two years. The ECB’s response to the bond market panic will depend on the circumstances it is facing, executive committee member Isabel Schnabel said Tuesday evening in Paris. “We have shown in the past that we can adapt flexibly and quickly to our respective circumstances.”

Thanks to the safeguards in place, the risk of so-called fragmentation – an “unjustified” increase in bond yields for the most indebted members of the euro area – is less likely today than it was a few years ago, said Schnabel, who oversees the markets. at the ECB.

Firm commitment to the euro

Despite falling bond prices following the announcement of the ECB’s tightening plans, Schnabel’s comments reflect an emerging consensus in the Governing Council. Therefore, a hasty presentation of a new instrument brings few benefits, but exposes the monetary authorities to the risk of being put to the test by the market.

Bloomberg financial service reported in April that the ECB was working on a new tool to use in the event of a bond failure in the euro area’s weaker countries. So far, the ECB has said it will use funds from previous asset purchases to address potential problems.

Investors, accustomed to the ECB’s large-scale market intervention, are still not convinced that the central bank can increase financial costs by keeping bond yields in check on the region’s most vulnerable members. Schnabel said the ECB will not tolerate “changes in financing conditions that go beyond fundamental factors and threaten the transmission of monetary policy”.

He pointed to the ECB’s Pandemic Emergency Purchase Scheme, which was flexible and temporary, and the concept of Outright Monetary Transactions as examples of the ability of policy makers to respond to different types of market stress. The former president Mario Draghi had put the latter in the classroom with the premise of “doing everything necessary” to save the euro. There were no volume limits for this, but strict conditions.

According to Schnabel, the ECB can react to new emergencies with existing or new tools. “These instruments may be different again, with different terms, different maturities and different safeguards to keep us firmly within our mandate,” she said of government bonds that could be sterilized to contain yield spreads. Then the liquidity created by the purchase would again be withdrawn from the market.

French council member François Villeroy de Galhau had already issued a corresponding statement. For his part, Schnabel argued that monetary policy “can and should” respond to a disorderly repricing of risk premiums. “Our commitment to the euro is our anti-fragmentation tool,” he said. “This commitment knows no bounds. And our track record of intervening when needed is the basis of that commitment. “

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