Business Maverick

Business Maverick

ECB ‘Very Open’ to Stepping In If Markets Overreact, Wunsch Says

The European Central Bank (ECB) headquarters beyond traffic passing residential buildings in Frankfurt, Germany, on Monday, May 23, 2022. While ECB policy makers have increasingly coalesced around the prospect of a first hike at their July 21 meeting in recent weeks, they have barely mentioned the possibility of a more aggressive half-point move such as the US Federal Reserve delivered this month. Photographer: Alex Kraus/Bloomberg

The European Central Bank’s Governing Council is ready to step in if it considers moves in government bond markets to be unjustified, according to Belgium’s Pierre Wunsch.

“Most of us — probably all of us, actually — are very open to doing something if it’s clear enough that there’s a problem of markets overreacting or unwarranted fragmentation,” Wunsch said in emailed comments Tuesday afternoon and confirmed Wednesday as the ECB prepared for an emergency meeting on recent euro-zone bond turbulence.“But we should be careful not to give too much of an impression to authorities that we will immediately jump to their help in whichever uncomfortable situation they might find themselves,” he said. “In addition, if you are too specific about a new instrument, there’s a concern that you’re going to lose flexibility. So, we should not over-engineer before knowing what the circumstances are.”

Wednesday’s meeting comes after the yield on Italy’s 10-year debt rose above 4% for the first time since 2014 this week. Investors are so far unconvinced the ECB can raise borrowing costs to combat unprecedented euro-area inflation while also keeping yields among the bloc’s most vulnerable members in check.

Officials expect to discuss using reinvestments from their pandemic-era asset-purchase program to combat market panic, according to people familiar with the matter. They’ve said they’re ready to create new instruments as needed and can do so quickly.

Italy's borrowing costs have increased relative to Germany's

The ECB last week committed to its first rate hike in more than a decade, pledging to lift by a quarter-point in July and by a larger amount two months later. Its deposit rate is currently at a record low of -0.5%, making it one of the slowest major central banks to act in the face of soaring prices.

Increasing rates toward 1.5% shouldn’t be complicated, according to Wunsch, who says monetary policy would still be accommodative up until that point.

“My personal opinion is that the next 150-200 basis points hikes are no-brainers because then we would still be with negative real rates in the short term,” he said. “It’s only when you go beyond that you really start being less expansionary in real terms.”

Wunsch said that as long as the ECB doesn’t see inflation “coming down, we are going to have to increase more.” While there’s no agreement on the pace of hikes after September, policy makers have shown they’re open to bigger steps, he said.

“The fact that we have more or less committed — unless the situation improves — to a more than 25 basis-point hike means that our understanding of gradualism doesn’t exclude increases of that magnitude,” Wunsch said. Whether that means a succession of 25 basis-point hikes or, for example, 50 basis-point moves, or a mix of increments, “is going to be a data dependent.”

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