ECB convenes extraordinary meeting due to differences in borrowing costs in the eurozone

The Governing Council of the European Central Bank (ECB) will hold an extraordinary meeting on Wednesday to discuss the increasing differences in borrowing costs among eurozone members following the announcement of interest rate hikes in July.

– The Governing Council will hold an ad-hoc meeting on Wednesday to discuss the current state of the market – said a spokesperson.

The invitation to the meeting was sent out on Tuesday evening, leading several council members to cancel their participation in a conference in Milan.

The ECB’s Governing Council meeting is expected to start at 11 AM Central European Time, but it is still unclear whether the bank will issue a statement after its conclusion, several informed sources said.

Bond yields have risen sharply after the ECB announced last Thursday that it would raise interest rates by a quarter percentage point in July due to elevated inflation in the eurozone, adding that they might raise them again in September, possibly even more.

The difference between yields on benchmark German government bonds and those of highly indebted southern European countries, such as Italy, has reached its highest level in over two years in recent days, signaling a sell-off of the debt of indebted eurozone members.

To mitigate the ‘risk of fragmentation’, or the large difference in borrowing costs among members, the ECB could use income from maturing bonds to purchase those with low yields or devise a completely new instrument.

Some analysts warn that purchasing the debt of highly indebted countries is likely to be insufficient, Reuters notes.   

ECB Executive Board member Isabel Schnabel stated on Tuesday that the ECB "carefully" monitors the situation and is ready to use the instruments at its disposal, but also to tailor new ones if it deems that market price changes are "chaotic".

– We will not tolerate changes in financing conditions that exceed fundamental indicators and jeopardize the transmission of monetary policy – Schnabel stated, adding that they will not shy away from anything to prevent fragmentation.

However, she believes that intervention instruments should not be announced in advance, as they should be tailored to the specific situation and accompanied by conditions, limitations, and safety mechanisms designed for each case individually.