MILANO – The ECB raises the cost of money and does so to a greater extent than initially anticipated, but which the markets had begun to take into account in the last few days: 50 basis points, thus closing the season of negative rates in one fell swoop which just happened to be inaugurated Mario Draghi (in 2014). While in Italy the crisis of the former central banker’s government is consummated, then Frankfurt announces the anti-spread shield. It is called the “Transmission Protection Instrument (TPI)”. A device that will ensure that “the monetary policy stance is transmitted in an orderly manner in all euro area countries” and “is a prerequisite for the ECB to fulfill its mandate to maintain price stability”.
Both decisions were approved unanimously, he remarked Christine Lagarde at a press conference. Lagarde detailed the eligibility conditions for the ICT, an unlimited shield, which are four: compliance with EU budgetary criteria, the absence of serious macroeconomic imbalances, debt sustainability and the adoption of sound and sustainable fiscal policies with respect to obligations taken with the Recovery and with the specific recommendations of the Commission. Lagarde explained (in response to a question about the Italian crisis, on which he glossed over) that with the ICTY “it will be possible to purchase securities from all Eurozone countries”, underlining that “the decision whether to activate the new instrument will be made to discretion of the Governing Council “after an analysis of the situation of the requesting country, the financial conditions and compliance with the criteria.
The rise in rates
After eleven years, therefore, comes the expected rate hike that was missing since April 2011. In detail, all three parameters are moving: on the main refinancing operations, on the marginal refinancing operations and on deposits with the central bank . They will be raised to 0.50%, 0.75% and 0.00% respectively, with effect from July 27, 2022.
BTP at “Greek” levels. And the hawks pick the ECB shield
by our correspondent Tonia Mastrobuoni
In announcing it, the Eurotower communiqué recalls the “strong commitment” of the Governing Council “to fulfill its mandate to preserve price stability”, which as we know are in the midst of an inflationary spiral that has spread from energy to many other aspects. Inflation in the Eurozone, according to the latest Eurostat data from June, soars to 8.6% when the ECB’s medium-term target is 2%. For this reason “it decided to raise the three key interest rates of the ECB by 50 basis points and approved the Transmission Protection Instrument (TPI)”.
In June, the ECB had anticipated a rise of 25 points. It now explains why it moved with a “broader intervention”: a decision that “is based on the Governing Council’s updated assessment of inflation risks and the increased support provided by the ICC for effective monetary policy transmission. This will support the return of monetary policy. “inflation towards the Governing Council’s medium-term objective by strengthening the anchoring of inflation expectations and ensuring that demand conditions adjust in line with the achievement of the medium-term inflation objective”. Behind the scenes, even the game of hawks and doves: on the one hand the squeeze is more like a hawk, on the other comes the shield that doves like.
Frankfurt wants to anticipate and take more space for the future, should the economic situation turn for the worse or the crisis in Ukraine twists even more. “Anticipating the exit from negative interest rates to today allows the Governing Council to move to an approach where rate decisions are made on a case-by-case basis,” the statement said. And in the future there may be other increases. “The future evolution of the reference rates as defined by the Governing Council will continue to be data-driven and will contribute to the achievement of the 2% inflation target in the medium term.”
The president Christine Lagarde on the other hand, he acknowledged, at a press conference, that the euro area economy “is slowing down” and this is weighed down by the war launched by Russia against Ukraine. And on Eurozone inflation, he says it “is expected to remain annoyingly high” beyond 2022, also due to the “depreciation” of the euro exchange rate.
The anti-spread shield
As for the ICC, for the Governing Council it serves to “support the effective transmission of monetary policy”. While raising rates to cool prices, the ECB wants to prevent excessively accentuated yield differentials between countries from generating a patchy effect of its policies. Rather, the “stance of monetary policy is transmitted in an orderly fashion to all euro area countries. The uniqueness of the Governing Council’s monetary policy is a prerequisite for the ECB to fulfill its mandate to maintain the stability of the euro. prices “, clarifies the press release as to prevent objections that it is out of its mandate. And further details: “The ICC represents a further tool available to the Governing Council that can be activated to counter unjustified, disordered market dynamics that seriously jeopardize the transmission of monetary policy throughout the euro area. The scope of the ICC purchases. it will depend on the severity of the risks for monetary policy transmission. Purchases are not subject to ex ante restrictions. By safeguarding the transmission mechanism, the ICC will enable the Governing Council to more effectively fulfill its mandate to preserve price stability. “
In a second communication, the ECB gave some more details on the program. Purchases by those who access it will be focused on public sector securities between one and ten years, but “if necessary, purchases of private sector securities could be considered”. Once the TPI is activated, the Eurosystem, by purchasing the bonds of the country in question, would not become a privileged creditor, but like all the other debt underwriters.
Before the shield goes off, however, Frankfurt recalls that there is another paraphernalia at its disposal: the flexibility to reinvest the repaid capital on the maturing securities of the pandemic emergency purchase program (PEPP) portfolio. ) which “remains the first line of defense in order to counter the risks for the transmission mechanism connected with the pandemic”.