ECB will keep fiscal pressure on governments, warns Lagarde

by Francesco Canepa and Balazs Koranyi

SINTRA, Portugal, June 28 (Reuters) – The European Central Bank’s forthcoming bond-buying program will reduce borrowing costs for the eurozone’s most vulnerable states but it will keep pressure on governments to that they clean up public finances, said Christine Lagarde, the president of the ECB, on Tuesday.

The ECB has announced its intention to raise interest rates from its next monetary policy meeting on July 21, just weeks after stopping its bond purchases in the markets.

This dual evolution of its strategy has had the effect in recent weeks of a sharp rise in bond yields of the most indebted countries in the euro zone, starting with Italy.

To put an end to this movement likely to cause a “dislocation” of the monetary bloc, the ECB has accelerated the work of developing a new program of securities purchases supposed to limit the widening of yield differentials between member countries.

“The new instrument will have to be effective while being proportionate and including sufficient safeguards to preserve the momentum of member states towards a sound fiscal policy”, said Christine Lagarde at the Annual Forum of Central Banks organized by the ECB in Sintra, in Portugal.

These remarks suggest that the new program will include constraints for the countries that will benefit from it, as several sources had explained to Reuters in recent weeks.

According to these sources, these conditions should however remain relatively flexible; they could, for example, relate to compliance with the economic recommendations of the European Commission already in force for access to Union funding.


Two sources meanwhile told Reuters that the ECB plans to withdraw cash from the eurozone banking system to offset the impact of its future bond purchases, so as not to increase the overall amount of cash in circulation.

In an interview with Reuters, the Governor of the National Bank of Belgium, Pierre Wunsch, even assured that the future program would provide unlimited support to the States concerned provided that their budget forecasts were credible.

“If there is undesirable fragmentation, we should act and I would even say that there should be no limits. There will be legal limits, of course, but conceptually, if it is clearly undesirable, there should be no limits. there are no limits,” he said.

“We don’t want to have too strict rules that prevent us from acting when it is desirable.”

The ECB also announced that it would allow countries with the highest yield spreads to benefit from the reinvestment of funds resulting from the maturing of securities purchased in recent years under the Emergency Purchase Program. facing the pandemic (PEPP). This measure will apply from July 1, said Christine Lagarde.

Regarding the announced rise in interest rates, the president of the institution explained that it should be done in small successive stages “but with the possibility of acting decisively in the event of a deterioration in inflation in the medium term. , especially if signs of unanchoring of inflation expectations appear”.

The ECB plans to raise rates by a quarter of a point on July 21 but it does not rule out a bigger hike in September if its medium-term inflation forecasts do not allow a return to its target of 2 %. (Report Francesco Canepa, French version Marc Angrand, edited by Jean-Michel BĂ©lot and Sophie Louet)

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