The ECB has mentioned it should “apply flexibility” in reinvesting redemptions coming due in its PEPP portfolio.
At the identical time, it should additionally speed up the present work happening on a brand new anti-fragmentation instrument, which is about to sort out the danger of euro zone fragmentation.
In an announcement made after its impromptu assembly immediately, the ECB mentioned: “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.”
ECB schedules emergency assembly
Charles Hepworth, funding director at GAM Investments, commented: “In response to the blow out in Italian and other peripheral bond yields, the ECB’s emergency meeting today had all the hallmarks of poor crisis management.”
He mentioned the anti-fragmentation rule was “as usual” a “behind-the-curve response to a problem that continues to build”.
He continued: “But finally acknowledging the issue is perhaps a positive step. At a minimum we will need to see the real details and implementation next month for bond investors to hold their nerve.”
Hetal Mehta, senior European economist at Legal & General Investment Management (LGIM), noticed: “It will have to be a tool that has limited/no conditionality – after all that is why Outright Monetary Transactions with its restrictions is not being deployed – but still keep those ECB members and euro area governments who worry about fiscal dominance on board.
“Anything that falls the wrong side of this line could be challenged in the European courts and undermine the ECB’s ability to act decisively.”
The selections have been made with a view to attempt to sort out borrowing prices in weaker eurozone economies, together with Italy, Greece, Spain and Portugal, all of which confronted rising 10-year bond yields earlier within the week. Italy’s 10-year bond yield had reached above 4%, the very best it had been since 2014.
Bond yields, nevertheless, fell this morning following the announcement of an impromptu ECB assembly in Frankfurt.
Ulrike Kastens, economist, Europe at DWS, additionally commented on the announcement: “The European Central Bank is responding with a more flexible re-investment policy under the PEPP. But more importantly, it is announcing a new anti-fragmentation tool to fight against a permanent, not fundamentally justified widening of yields.
“While the design is still completely unclear, the announcement that such an instrument is planned should provide some relief to the markets.”
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Source: countryask.com
