ECB speeds up work on crisis tool after Italian bond blowout

THE European Central Bank instructed committees to create a new tool to combat unwarranted jumps in euro-area bond yields as markets strain at the prospect of the first interest-rate increases in more than a decade.

Following an emergency meeting on Wednesday, convened after Italian yields surged to the highest since Europe’s sovereign-debt crisis, the Governing Council also said it will apply flexibility in reinvesting redemptions coming due in its pandemic portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism.

“The pandemic has left lasting vulnerabilities in the euro-area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions,” the ECB said in a statement.

Italian bonds pared their most aggressive advance in more than two years, with 10-year yields 32 basis points lower at 3.86 per cent versus 3.76 per cent before the statement was released. The euro erased most gains against the dollar, leaving it 0.1 per cent higher at US$1.04291.

The ECB surprised markets on Wednesday by holding the unscheduled meeting to discuss a market backdrop that’s deteriorated markedly since plans to start lifting borrowing costs from record lows were outlined last week.

Investors have been unconvinced that officials can raise borrowing costs to combat unprecedented euro-zone inflation while also keeping yields among the bloc’s most indebted members in check. A possible 75 basis-point rate increase from the Federal Reserve later in the day could add to the jitters.

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“I see today’s statement as the bare minimum of what could be expected, but also the most realistic outcome,” said Piet Christiansen, chief strategist at Danske Bank. “With ECB tasking the committees they have sent a signal that they have fully committed to ensure the functioning of the monetary policy transmission. However, they have also bought themselves some time. We will likely only hear from the committees at the July or September meeting.” BLOOMBERG