Unlike other monetary policy makers, European Central Bank officials face the additional challenge of setting one policy in many different countries, each with its own fiscal policy, economic outlook and debt levels. ..
Banks will strengthen monetary easing policy by raising interest rates and ending trillions of euros in bond purchase programs, while preventing government borrowing costs from fluctuating significantly across the euro area, hindering the effectiveness of monetary policy. I’m trying.
On Thursday, banks will announce details of new policy tools they are designing to prevent rising borrowing costs that are out of sync with the country’s economic fundamentals.
These differences between countries are most clearly reflected in the yield on sovereign debt, which is a measure of government borrowing costs. Investors will demand higher yields from countries that believe that lending is risky, probably due to a history of defaults, political instability and slowing economic growth.
Italy’s borrowing cost, one of the best The debt burden in the euro area has increased sharply since the European Central Bank reaffirmed its plans to raise rates. They surged again this week when Prime Minister Mario Draghi resigned Thursday after a major part of the coalition abandoned him and the country’s government collapsed. The difference between Italian and German 10-year Treasury yields, or spreads, has doubled since this time last year.
The European Central Bank believes that the relationship between government borrowing costs and economic fundamentals has suddenly collapsed. So-called market fragmentation.. He said he would not tolerate this as it would reduce the effectiveness of other monetary policy tools to curb inflation.
“When we change our stance, it’s important that funding terms move broadly in sync across the eurozone,” said bank vice president Luis de Gindos earlier this month. “For two equally healthy companies in the euro area, changes in monetary policy stance should have a similar reaction to funding terms, no matter where they are located.”
At the end of June, banks began their first defense against fragmentation from the beginning of July by leading a reinvestment of earnings from bonds maturing in a € 1.85 trillion ($ 1.88 trillion) pandemic bond purchase program. Announced that the line will be implemented. For national bonds that best support the monetary policy goal of consistency. For example, you might use the proceeds from the maturity of a German bond to buy Italian debt.
At the same time, the bank said it is working on new tools to prevent significant diversification of borrowing costs in some countries. Internal disagreements over the design of this tool had to be overcome to ensure that the government did not encourage financial irresponsibility under the belief that the central bank would come to the bailout.
The central bank has experienced this battle before. In the midst of the eurozone sovereign debt crisis 10 years ago, the central bank will design a policy tool that is in line with Draghi’s commitment to save “whatever he needs”, then the governor of the European Central Bank. It was made. Euro. It faced many political and legal challenges.
After all, if the country was part of a formal bailout and reform program, no tools were used to allow banks to purchase the country’s debt indefinitely.
New tools are expected to reduce the conditions under which a country will benefit from it.
