‘Strong ECB crisis tool could stay on the shelf’

Bloomberg

European Central Bank (ECB) Governing Council member Yannis Stournaras said a new tool to keep debt-market turmoil at bay as interest rates rise may not need to be used if it’s powerful enough to persuade investors not to test it.
In a Bloomberg Television interview in Aix-en-Provence, France, Stournaras said there’s a “very good debate” under way on the instrument, expressing confidence in a “consensual, efficient solution” that he hopes will surprise markets “on the positive side.”
“I believe that there is a lot of truth in the idea that if we convince markets that this is going to be a strong tool, we might not need it,” the dovish Bank of Greece governor said. “We’ll have it on the shelf. This is the good scenario.”
Grappling with record inflation, ECB officials gearing up for a series of rate hikes are also racing to ensure there’s no adverse reaction in the bond markets of the euro zone’s more vulnerable members.
Since a jump in Italian government yields in June, they’ve accelerated work on the so-called anti-fragmentation tool, which policy makers are so
far calling the Transmission Protection Mechanism.
Stournaras’s comments bring to mind the ECB’s Outright Monetary Transactions program that followed former President Mario Draghi’s famous pledge to do “whatever it takes” to keep the euro area together amid a sovereign-debt crisis. In that case, his words were persuasive enough that OMT was never used.
While officials aren’t certain yet that the new instrument will be ready for their July 21 decision, according to people familiar with the matter, Stournaras was more upbeat. But he declined to go into detail on conditions that euro-area members may need to meet to be eligible for assistance.
He underlined that the instrument is necessary, however, in the absence of wider European Union reforms.
“We might have fragmentation episodes not because of policies but just because we are an imperfect economic and monetary union,” Stournaras said. “We should mend this, but up to the moment this is achieved the ECB needs to take into account the transmission mechanism.”
“The time has come to revise the fiscal framework enshrined in the stability and growth pact,” he said. “Our aim should be to ensure member states’ debt sustainability, to achieve counter-cyclicality of fiscal policy and to create a central fiscal capacity of all euro member states.”
The ECB’s plan to lift the deposit rate by a quarter-point this month is “very likely” to happen, he said in the interview. With a bigger penciled in for the following meeting, in September, Stournaras said “we’ll see what the data will say both on the inflation front but also on the activity front.”
He sees price growth starting to slow toward year-end and approaching the 2% medium-term target in 2024. It’s currently more than four times that level.
“I will not be able to tell you where it will peak because it depends on exogenous factors which cannot be measured by models,” Stournaras said. “It perhaps depends on geopolitical considerations.”
The rate increases would coincide with a slowdown in the 19-member euro-zone economy — one that may yet become a recession. Predictions of a contraction are on the rise as the prospect of a Russian energy cutoff this winter becomes ever-more real. ING warned that a downturn is coming regardless.
“There are stagflationary winds blowing — there’s no question about that,” Stournaras said, stressing that Europe isn’t seeing stagflation yet. “But for the moment we don’t expect negative growth this year or next year.”