New anti-crisis tool: Villeroy: ECB tool should send clear message without limit

The European Central Bank's new anti-crisis tool should show that the monetary authorities' determination to defend the integrity of the euro knows no bounds, said ECB Governing Council member Francois Villeroy de Galhau.

Although there are still "unanswered questions" about the measure against so-called fragmentation in the currency area announced last week, there is a certain agreement on the type of protective shield, according to the governor of the French central bank.

"It should be available to the extent necessary to make our unconditional commitment to protecting the euro very clear," Villeroy said in an interview with Italian newspaper Corriere della Sera.

“The more credible such an instrument is, the less it has to be used in practice.

This is how a backstop works.”

In addition, the tool must ensure that the ECB's monetary policy stance is reflected in the transmission of its policy and a separate tool is available to achieve this.

In Villeroy's view, a combination of rules, criteria, discretion and collective discussion in the council should form the basis for intervention in the markets: "There should be some constructive ambiguity about how we use such a new tool," he said.

Villeroy added that the ECB's crisis bond purchases should be offset by sales of other assets so the purchases don't hamper the bank's efforts to combat record inflation.

Bloomberg had reported last week that sterilization will likely be part of the new tool.

The central bank can also be "more flexible" than other programs, allowing itself to sell securities before maturity if it believes the market's dysfunction has ended.

ECB President Christine Lagarde on Monday confirmed the European Central Bank's intention to raise interest rates in July and September.

She underlined that worries about the tensions in the financial markets should not stop the fight against inflation.

"We intend to raise the key ECB interest rates by 25 basis points at our monetary policy meeting in July" and to make another rate hike in September, the central bank president told the European Parliament on Monday.

Lagarde sees himself in the mandate

There she also commented vaguely on the new crisis instrument.

It aims to combat rampant reactions in the government bond market - the so-called fragmentation of the euro zone - and underpins the monetary authorities' commitment to stabilize inflation at 2 percent in the medium term, she said.

"We need to be absolutely sure that our monetary policy stance is transferrable to all euro area countries," she said.

"That corresponds to the core of our mandate."

The Governing Council was forced to speed up work on the instrument at an emergency meeting last week after Italian bond yields soared.

Such an instrument would likely involve the purchase of bonds from highly indebted countries, details of which plan are not yet known.

The plan is expected to be finalized ahead of the next scheduled Governing Council meeting on July 20-21, people familiar with the matter have said.

Lagarde declined to comment on the details of the instrument.

"Suffice it to say that we will deal with fragmentation when the risk arises," she told parliamentarians.

“And we will do it with the appropriate tools, with the appropriate flexibility, effectively, proportionately and within our mandate.

And anyone who doubts that determination is making a grave mistake."

In an interview with Bloomberg, Latvian ECB Governing Council member Martins Kazaks was also very general about how the instrument should work.

The ECB will "get it under control" if action is needed, he said.

But one also has to live with increased volatility on the financial markets now that a long period of negative interest rates is behind them.

At its June meeting, the ECB downgraded its economic forecasts for this year and next and, given rising energy and food costs, is also anticipating significantly higher inflation.

On Monday, Lagarde also pointed out that wage pressures are showing slight signs of picking up.

"Wage growth has started to accelerate, although it is still moderate," she said.

"We expect negotiated wage growth to continue to moderately strengthen in 2022 and then remain above average levels for the projection horizon, supported by tight labor markets, minimum wage increases and some offsetting effects of high inflation rates."