Milan, 21 July 2022 – La Bce raise i interest rates of 0.50% and introduces a new anti spread shield, the Tpi. The announcement comes from the president Christine Lagarde, who at the press conference underlined how “in the end all the members of the board have aligned themselves with the decision” to increase the rates by 50 basis points (thus higher than the expectations which foresaw + 0.25%). The today’s hike, the first since July 2011, puts an end to the era of zero or even negative rates. The rate on main refinancing operations rises to 0.50%, the rate on marginal operations to 0.75% and the rate on deposits, which commercial banks park at the same institution, exits the negative phase and goes to zero.
But not only. The “Transmission Protection Instrument (TPI)” is also established. “The ECB will not be held hostage by anyone”, Lagarde always explained, and for this reason he will evaluate four key principles on any beneficiary countries. The first will be compliance with the general budget rules of the EU, continued the president of the Eurotower; the second requirement will be “the absence of serious budgetary imbalances”; the third “budget sustainability” and the fourth requirement the presence of “solid and sustainable macroeconomic policies”, with the commitment to respect the parameters of the EU Recovery Fund (with the NRPs) and the specific recommendations for each country based on the semester EU. The assessments will be made by the governing council based on the analyzes of the European Commission, the European Stability Mechanism, the International Monetary Fund and other institutions, in addition to the internal analysis of the ECB.
“If necessary we will not hesitate” to use it, clarified Lagarde who did not want to comment on the Italian situation with the resignation of Prime Minister Mario Draghi. The chairman pointed out that such a strong increase in rates was possible precisely because the board provided with hedging instruments such as the Tpi and the possibility of reinvesting the repaid capital on the maturing securities of the portfolio of the Purchase Program for the pandemic emergency (Pepp). More specifically, the extent of the ICT purchases will depend on the severity of the risks for the transmission of monetary policy. “The purchases are not subject to ex ante restrictions”, underlined the ECB, specifying that the “flexibility” in reinvesting the repaid capital on the maturing securities of the portfolio of the pandemic emergency purchase program, the Pepp, “remains the first line of defense in order to counter the risks to the transmission mechanism related to the pandemic “.
The ECB’s anti-spread shield
Lo anti-spread shield of the ECB will serve to stifle the 2011-style debt crises in the bud. The Transmission Protection Mechanism (‘Tpi’) is not a parachute ready to activate with every blaze of the spread. But an instrument, which supports the pre-existing ones, Draghi’s OMT and the reinvestments of the pandemic ‘Pepp’, to be activated with the precise aim of ensuring that the transmission of monetary policy impulses is homogeneous in the euro area. The Tpi will buy government bonds (with the possibility of extending to other bonds) with a maturity of between one and ten years, sterilizing purchases so as not to fuel inflation. But it does not set an explicit maximum threshold for the ‘spread’. No automatism: on the contrary, the president of the ECB Christine Lagarde stressed that the ECB will decide in a “discretionary” manner. The conditions for benefiting from it are not the rigid ones of the ESM, but the ICT is not even a blank check: respect for the EU ‘fiscal framework’, the absence of serious macroeconomic imbalances, debt sustainability, compliance with the commitments made with recovery and with the specific recommendations of the EU Commission. Lagarde made no secret that “some components of the instrument are best kept confidential”. And here is the disappointment of many investors today: the shield does not turn the clock back to when the ECB was the main buyer of debt in the markets.