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Lagarde defends ECB plan to counter bond market panic

The European Central Bank is determined to cut off “budding” any split in lending costs between eurozone countries, its president Christine Lagard said on Monday, warning anyone who doubts he is “making a big mistake”.

Appearing before EU lawmakers in Brussels, Lagard defended the ECB’s decision, made at an emergency meeting last week, to speed up work on a new policy tool to deal with the recent rise in lending costs in more vulnerable countries. “You have to kill it with a bud,” the ECB president said.

Since the ECB voted earlier this month to start removing some of its particularly loose monetary policy, bond yields of weaker countries like Italy have soared faster than those of more stable countries like Germany.

Lagard said the ECB did not want to let this “split risk” happen and “delay” the impact of its policy decisions. The president of the ECB told lawmakers: “You want to get ahead of it and you want to prevent it.”

Last weeks Emergency meeting It came after the bond yields of countries like Italy and Spain rose to their highest level in eight years following the ECB’s interest rate decision six days earlier to stop buying more bonds and start raising interest rates.

The ECB fears that a panic in the bond market could raise the lending costs of weak countries to a level that would drag them into a financial crisis. 2 percent.

The bond markets in the eurozone were sold while Gard spoke on Monday afternoon. Germany’s 10-year bond yield climbed to 1.75%, while Italy’s yield rose to 3.67%. Bond yields rise as their prices fall.

The sale follows a higher-than-expected demand from IG Metall, Germany’s largest union, for a 7 to 8 percent annual wage increase for 3.8 million metal and electricity workers – many of them in the country’s huge car industry. Higher wages could push inflation up and force the ECB to take more aggressive action to curb price growth.

Asked to explain why the ECB was slower to raise interest rates than Switzerland’s central bank, which announced a half-percent rise last week, Lagard said such comparisons were “disgusting”. She added: “Circumstances are different, the history of monetary policy is different, the strength of currencies is different.”

Some MPs have pressured Laguard to explain how the ECB could contain the strip – or spread – between the borrowing costs of different countries if investors bet in the other direction.

Luis Garricano, a Spanish MP, asked if the ECB was in danger of “disagreeing with the market on what the band should be and then the risk is that the ECB will end up buying everything and not the market”.

By refusing to give details on how such a new instrument could work or when it would be launched, Lagard argued that the ECB should be “absolutely certain that our monetary policy is virtually driven by all eurozone countries”.

Lagard said: “Fragmentation will be addressed if the risk arises; and this will be done with the right instruments, with the proper flexibility; it will be effective; it will be proportionate; it will be within our mandate and anyone who doubts determination will make a big mistake.”

Lagarde defends ECB plan to counter bond market panic Source link Lagarde defends ECB plan to counter bond market panic

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