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New ECB bond buys shouldn't get in way of fighting inflation

Euro zone growth will likely be negative in Q4, inflation high, ECB's De Guindos Says
Euro zone growth will likely be negative in Q4, inflation high, ECB's De Guindos Says Copyright Thomson Reuters 2022
Copyright Thomson Reuters 2022
By Reuters
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By Jesús Aguado and Emma Pinedo

MADRID -The European Central Bank's tool to combat rising government debt yields in some euro zone countries should not interfere with the bank's aim to control inflation, ECB Vice-President Luis de Guindos said on Wednesday.

"Fragmentation instruments should not interfere with the overall monetary policy approach, which should be focused on fighting inflation," De Guindos told a financial event in Spain in remote remarks.

In an emergency meeting last week, the European Central Bank decided to direct bond reinvestment to help nations on the bloc's southern rim, and to devise a new instrument to contain divergence in borrowing costs.

De Guindos said that the implementation of a specific instrument to prevent fragmentation "will allow monetary policy to act more forcefully to reduce inflation towards the path defined by the ECB" of a 2% target in the medium-term.

The ECB has signalled future rate hikes to bring down inflation, which hit a record high 8.1% last month in the euro zone.

At the same event, Spanish Economy Minister Nadia Calvino said she and her fellow ministers from the EU did not discuss the conditions of an anti-fragmentation tool last week.

"It has not been discussed in those terms" at the recent Eurogroup meeting, Calvino said.

She added that the ECB's commitment had already been felt in the markets with spreads between the Spanish and German 10-year-bund, hovering towards 110 basis points, down from close to 140 basis points before the ECB's announcement last week.

De Guindos said that a potential new tool should be different from previous plans such as the pandemic emergency purchase programme (PEPP), the Asset Purchase Programme (APP) or the Outright Monetary Transaction (OMT) programme set up by the ECB after the summer of 2012.

"The situation is quite different currently, and the risk premiums are not comparable at all," he added.

At the height of the sovereign debt crisis in July of 2012, Spain's risk premium rose above 600 basis points.

"There are circumstances in which, as a consequence of market tensions, the markets overreact and spreads start to increase beyond what is reasonable", De Guindos said.

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