The European Central Bank has launched an extraordinary meeting of its interest rate setters, sparking speculation that it may announce measures to tackle rising borrowing costs in weaker eurozone economies.
The ECB said earlier Wednesday: “The Governing Council will hold an ad hoc meeting on Wednesday to discuss current market conditions.” The meeting started at 11 o’clock CET.
The meeting, less than a week after the board’s last vote on interest rates, has boosted investors’ expectations that the central bank is preparing to announce a policy instrument to prevent a new debt crisis in the region.
Italian government bonds rose after news of the planned meeting, turning some of the recent sales, which analysts said brought the country’s borrowing costs to the “danger zone”.
Gilles Moek, Axa’s chief economist and insurer, said that “the stakes are high” for the ECB “now that everyone is wiping out their debt sustainability spreadsheets for Italy, they probably need to go one step further”.
The 10-year yield on Italian government bonds fell about 0.2 percentage points in volatile early trading on Wednesday to about 3.98 percent, according to Tradeweb. It rose to almost 4.2% in the previous session from just over 1% at the end of 2021.
Eurozone central bank disappointed investors last Thursday with a lack of details on when or how it will intervene in government bond markets to tackle so-called financial fragmentation, which has raised borrowing costs for vulnerable southern European countries more than for their northern neighbors. .
Moec said investors would expect the ECB “at least to say it will launch a new instrument” and to give more details on how it will use flexibility in reinvesting maturing bond yields to tackle the fragmentation of bond markets. in the euro area.
The gap or spread between Italian and German borrowing costs has widened to 2.4 percentage points, doubling last year’s level and up by about 2 percentage points before last week’s ECB meeting, when interest rates set an end to extremely loose money a policy of announcing plans to stop buying more bonds and start raising interest rates.
The euro reversed some of its losses, rising 0.6% against the dollar to $ 1,047 early Wednesday after the ECB’s statement was released by the news.
Shares of European banks also rose on Wednesday. The Euro Stoxx Banks index rose 3.7%, with major Italian lenders UniCredit and Intesa Sanpaolo jumping more than 6%.
The meeting comes ahead of the Federal Reserve’s monetary policy decision on Wednesday, with the market expecting the US Federal Reserve to raise interest rates by 0.75 percentage points.
ECB Executive Board member Isabel Schnabel said in a speech Tuesday night that the central bank was approaching a time when it would intervene in bond markets, saying “some borrowers have seen significantly greater changes in bond conditions.” financing from others from the beginning of the year ”.
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She added: “Such changes in funding conditions could be a deterioration in the transmission of monetary policy, which requires close monitoring.
Schnabel, the ECB’s chief executive who oversees its market operations and one of the most influential voices on its board, said the central bank’s commitment to the euro knows no bounds. “And our attempt to intervene, when necessary, supports this commitment,” she added.
Analysts estimate that the ECB already has an additional € 200 billion to spend on stressed government debt due to attracting some reinvestment of maturing government assets within a year.
The last time the ECB convened an unscheduled board meeting was at the start of the coronavirus pandemic in March 2020, when it launched a large-scale bond-buying scheme to counter the sharp bond sell-off to more vulnerable eurozone countries, such as Italy.
ECB President Christine Lagarde plans to continue her trip to the United Kingdom on Wednesday night to receive an honorary degree from the London School of Economics, where she is scheduled to speak at an event.
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