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Unlimited commitment to protect the euro

D.The European Central Bank’s new anti-crisis instrument should demonstrate that monetary authorities’ determination to defend the integrity of the euro knows no bounds, said Francois Villeroy de Galhau, a member of the ECB’s Governing Council. While there are still “unanswered questions” about the measure against the so-called fragmentation of the currency area announced last week, there is some agreement on the type of protective shield, according to the governor of the French central bank.

“It should be available to the extent necessary to make our unconditional commitment to protect the euro very clear,” Villeroy said in an interview with the Italian newspaper Corriere della Sera. “The more credible such a tool is, the less it has to be used in practice. This is how a backstop works ”.

Furthermore, the instrument must ensure that the ECB’s monetary policy stance is reflected in the transmission of its policy and a separate instrument is available to achieve this. According to Villeroy, a combination of rules, criteria, discretion and collective discussion in the board should form the basis for market intervention: “There should be some constructive ambiguity about how we use such a new tool,” he said.

Villeroy added that the ECB’s crisis bond purchases should be offset by the sales of other assets so the purchases don’t hinder the bank’s efforts to fight record inflation. Bloomberg reported last week that sterilization will likely be part of the new tool. The central bank may also be “more flexible” than other programs, allowing itself to sell securities before maturity if it believes the market failure has ceased.

ECB President Christine Lagarde on Monday confirmed the European Central Bank’s intention to raise interest rates in July and September. You stressed that concerns about financial market tensions should not stop the fight against inflation. “We intend to raise key ECB interest rates by 25 basis points at our monetary policy meeting in July,” and make another rate hike in September, the central bank president told the European Parliament on Monday.

Lagarde can be seen in the mandate

There he also vaguely commented on the new crisis tool. It aims to combat rampant reactions in the government bond market – the so-called fragmentation of the euro area – and supports the monetary authorities’ commitment to stabilize inflation at 2% over the medium term, she said. “We need to be absolutely sure that our monetary policy stance is transferable to all eurozone countries,” she said. “This corresponds to the heart of our mandate”.

The Governing Council was forced to accelerate work on the instrument at an emergency meeting last week after Italian bond yields soared. Such an instrument would likely involve the purchase of bonds from highly indebted countries, the details of which are not yet known.

The plan is expected to be finalized before the next Governing Council meeting scheduled for July 20-21, people familiar with the matter said. Lagarde declined to comment on the details of the instrument.

“Suffice it to say that we will deal with fragmentation when the risk arises,” he told MPs. “And we will do it with the right tools, with the right flexibility, in an effective, proportionate way and within our mandate. And anyone who doubts this determination is making a big mistake. “

In an interview with Bloomberg, Latvian member of the ECB Governing Council Martins Kazaks was also very general about how the tool should work. The ECB “will have the issue under control” whether action is needed, he said. But we also have to live with greater volatility in the financial markets now that a long period of negative interest rates is behind us.

At its June meeting, the ECB downgraded its economic forecasts for this year and next and, given the rise in energy and food costs, it also expects significantly higher inflation. On Monday, Lagarde also pointed out that wage pressures are showing slight signs of recovery.

“Wage growth has started to accelerate, although it is still moderate,” he said. “We expect negotiated wage growth to continue to strengthen moderately in 2022 and then remain above average levels for the projection horizon, supported by tight labor markets, minimum wage increases and some offsetting effects of high inflation rates.” .

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