SINTRA, Portugal (Reuters) – The European Central Bank’s future bond-buying program will help prevent an excessive widening of yield spreads within the euro zone while maintaining pressure on governments to clean up public finances, said ECB President Christine Lagarde on Tuesday.
The ECB has announced its intention to raise its interest rates from its next monetary policy meeting on July 21, only a few weeks after having stopped its purchases of bonds on 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, which could cause a “dislocation” of the monetary bloc, the ECB has accelerated work on drawing up a new securities purchase program that is 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 maintain member states’ momentum towards sound fiscal policy,” said Christine Lagarde at the annual Central Banks Forum organized by the ECB 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 have also 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.
Concerning the announced rise in interest rates, Christine Lagarde explained that it should take place in small successive stages “but with the possibility of acting decisively in the event of a deterioration in medium-term inflation, in particular if signs unanchoring of inflation expectations are appearing”.
The ECB plans to raise rates by a quarter of a point on July 21, but it does not rule out a larger rise in September if its medium-term inflation forecasts do not allow for a return to its 2% target.
(Report Francesco Canepa, French version Marc Angrand, told by Jean-Michel Blot)