ECB Announces Creation of New Instrument to Address Fragmentation at Extraordinary Meeting

The European Central Bank has accelerated work on a new tool to combat unjustified ‘jumps’ in bond yields in the eurozone as markets are ‘on edge’ due to the possibility of interest rate increases for the first time in over a decade, they announced in a statement.

Following an emergency meeting convened after Italian yields drastically rose for the first time since 2014, the Governing Council stated that it has instructed committees to create a new instrument to address the so-called fragmentation.

Additionally, in their statement, they indicated that they would utilize the Pandemic Emergency Purchase Programme (PEPP), showing flexibility in reinvesting redemptions to preserve the functioning of the monetary policy transmission mechanism.

– The pandemic has left lasting vulnerabilities in the eurozone economy that indeed contribute to the uneven transmission of the normalization of our monetary policy – stated the European Central Bank in its announcement.

Specifically, Italian bonds have diminished their most aggressive advance in over two years, with 10-year yields dropping by 32 basis points to 3.86 percent, compared to 3.76 percent before the announcement. The euro erased most of its gains against the dollar, leaving it 0.1 percent higher at $1.04291.

It was previously announced that ECB officials would be called to sign ‘reinvestment’ of bond purchases conducted under the now-stopped pandemic program, which is a response to the crisis they marked in their decision last week. Similarly, the ECB announced a reduction in the purchase of government bonds and an increase in the interest rate from -0.5 percent to zero in the coming months.

Executive Board member responsible for market operations at the ECB Isabel Schnabel stated ahead of the meeting that any response to panic in the bond market would come when necessary and would depend on the specific situation officials are facing.