The President of the European Central Bank (ECB), Christine Lagardestated this Thursday that his body could create new tools to combat an uneven rise in risk premiums of the countries of the euro zone if this occurs as a result of the invasion of Ukraine and the incipient hardening of monetary policy. “If necessary, we can design and deploy new instruments to ensure the transmission of monetary policy as we move down the path of policy normalization, as we have demonstrated on many occasions in the past,” he said.
Faced with the brutal rise in inflation and despite the war, the monetary authority of the euro zone announced last week a advancement on the scheduled schedule for the reduction of your purchases of public and private debt, while leaving the door open to put an end to said acquisitions and to approve “some time later” the first rate hike since 2011. Such a strategy could cause risk premiums (possibility of default in the eyes of the market of the public debt of a country with respect to that of Germany, considered the safest) grew more in the partners of the euro with public finances more fragile, like Spain. This is something that already happened in the debt crisis of 2012 and, to a lesser extent, at the beginning of the pandemic in 2020.
In a conference held in Frankfurt, the senior French official has reiterated that the “flexibility” is essential to ensure that the ECB’s monetary policy is transmitted “uniformly” to the entire euro zone. “With divergent initial conditions, exogenous shocks (such as covid or the invasion of Ukraine) can hit economies differently. asymmetric. If this leads to financial fragmentationthe transmission of monetary policy may be interrupted,” he acknowledged.
For this reason, he continued, the ECB’s governing council is “prepared to use a wide range of instruments to deal with fragmentation, including reinvestment of our portfolio under the Pandemic Emergency Purchase Program (PEPP).” Unlike previous debt purchase programs, the PEPP thus allowed the ECB to focus purchases on countries where they rose the most risk premiums, something that will also be able to do with the reinvestment of maturing bonds. And if this is not enough, he added, new tools could be created.
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Lagarde, likewise, has reiterated the messages that she launched last Thursday: the inflation will be located this year 5.1% average on center stage at the ECB, but could exceed 7% in the adverse scenario. Faced with this situation, the central bank of the euro has decided to accelerate the reduction of debt purchases, it will put an end to them in the third quarter if its inflation forecasts are met and “some time later” still undetermined it would begin a “gradual” rate hike. However, it could also totally change of plans if the war upsets the expected evolution of prices.
“Monetary policy today faces a new challenge. We are increasingly certain that the dynamics of inflation in the medium term will not return to the pattern we saw before the pandemic. But we need to manage a shock that, in the short term, pushes inflation above our target and reduces growth,” he justified.