by Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – Bundesbank President Joachim Nagel on Monday warned the European Central Bank (ECB) against any attempt to lower borrowing costs for southern eurozone countries and said the focus should be on fighting inflation, which may require more interest rate hikes than expected.
The ECB, which is due to raise its interest rates at its July 21 meeting, has pledged to draw up a new securities purchase program intended to limit the widening of yield spreads between German bonds, deemed safer, and those of countries said to be peripheral to the monetary bloc, such as Italy and Spain.
Joachim Nagel said that such a project should only be put in place in exceptional circumstances and should have precisely defined conditions and duration, so that the ECB does not give the impression that it will provide always favorable financing conditions.
“I would therefore caution against the use of monetary policy instruments to limit risk premia, as it is virtually impossible to establish with certainty whether a widening of yield spreads is fundamentally justified or not,” he said. he said in a speech.
These remarks constitute the most important public disagreement on the policy of the ECB since the taking office in January of Joachim Nagel at the head of the German central bank and could testify to the emergence of a possible new gap between the two institutions, that characterized the last decade.
Prior to these statements, sources familiar with the discussions had reported to Reuters that the head of the German central bank, without directly opposing the European Central Bank’s plans, had expressed his rejection of further support from the ECB for the least developed countries. more in debt at an emergency meeting of the institution last month.
If support is indeed granted, it must be “strictly temporary” and must make it possible to maintain pressure on countries to conduct sustainable budgetary policies and reduce their level of indebtedness, said Joachim Nagel.
Support must further be justified solely on monetary policy grounds and bond purchases from southern countries must be halted so that the overall policy stance is not affected, he added.
The President of the Bundesbank believes that the ECB must also focus on the fight against inflation as a priority, because the interest rate hikes planned to bring down prices could prove insufficient.
During the June 15 videoconference, convened with only a few hours’ notice, leaving very little time for governors to study the preparatory documents, the sources indicated that Joachim Nagel had recalled that the main mission of the ECB was the control of high inflation and not the fight against fragmentation.
RECORD INFLATION IN JUNE
In the euro zone, inflation came out last Friday at a record level of 8.6% over one year in June, while producer prices, published on Monday, showed an increase of 36.3% over one year in May.
“The ‘unanchoring’ of inflation expectations must be avoided no matter what,” said Joachim Nagel. “Which implies in the immediate future a resolute action of monetary policy (…) the still very accommodative orientation of monetary policy should be quickly abandoned”, he added.
Other sources told Reuters last week that the ECB would buy bonds issued by Italy, Spain, Portugal and Greece using the proceeds from the German, French and Dutch debt maturities it holds in portfolio, to limit the widening of yield differentials between States.
With this scheme, it is likely that the share of German debt in the ECB’s balance sheet falls below the required quota while it is supposed to respect a distribution between countries.
The Bundesbank would also suffer losses if it were forced to sell German bonds to offset debt purchases from other countries.
ECB members who have spoken since the June 15 videoconference, including hawks Pierre Wunsch of the National Bank of Belgium and Klaas Knot of the Dutch central bank, backed President Christine’s promise. Lagarde to prevent a financial fragmentation of the euro zone.
(Report Balazs Koranyi and Francesco Canepa, French version Laetitia Volga and Claude Chendjou, edited by Kate Entringer and Camille Raynaud)