Last minute ECB meeting to consider market conditions

The European Central Bank will hold an emergency monetary policy meeting on Wednesday, after bond yields surged in recent days for many governments in the eurozone.

“They will hold a special meeting to discuss current market conditions,” a central bank spokesman told CNBC.

Borrowing costs for many countries have risen sharply in recent days. Indeed, earlier on Wednesday, a gauge known as Europe’s Fear Barometer — the difference between Italian and German bond yields widely watched by investors — widened to its highest margin since early 2020. The 10-year Italian government bond yield also passed. years mark 4% earlier this week.

The moves in the bond market, which highlight tension among investors, have been linked to concerns that the central bank will tighten monetary policy more aggressively than previously expected.

Meanwhile, the European Central Bank failed last week to provide any details on possible measures to support heavily indebted eurozone countries, adding to concerns among the investment community.

However, in the wake of Wednesday’s announcement, bond yields fell and the euro rose against the US dollar. The euro rose 0.7% to $1.04 before the market opened in Europe.

Italian bank shares also rose on the back of the announcement. Intesa Sanpaolo and Banco Bpm are both up 5% in early European trading hours.

The market reaction so far indicates that some market players expect the European Central Bank to address concerns about financial fragmentation and is already providing some clarity on what kind of measures it might take to support heavily indebted countries.

The European Central Bank’s decision to meet on Wednesday also comes just hours before the interest rate decision by the US Federal Reserve. Market expectations are for a rate hike of 75 basis points, the largest increase since 1994.

Speaking to CNBC’s Karen Tso on Wednesday, French Finance Minister Bruno Le Maire said he would not be concerned if the Fed’s moves affected France’s economic growth. “The main point now and in the coming months is to lower the level of inflation,” he said.

Escalate when needed?

Wednesday’s announcement followed a letter from a central bank member to address some of the recent market volatility regarding financial fragmentation.

“Our commitment to the euro is an anti-fragmentation tool. This commitment has no limits. Our track record of intervening when needed supports this commitment,” Isabelle Schnabel, a member of the European Central Bank’s Executive Board, said in Paris on Tuesday.

One of the most defining moments in ECB history occurred in 2012 when former President Mario Draghi said the central bank would do “whatever it takes” to protect the single currency. Many also saw the European Central Bank progressing big and fast in the wake of the coronavirus pandemic.

Financial fragmentation is a risk to the eurozone. Although the 19 members of the Eurozone have different financial capabilities, they share the same currency. As such, instability in one country can spread to other euro capitals.

“We will respond to new emergencies with existing and potentially new tools. These tools may look different again, with different circumstances, duration and safeguards to remain firmly within our mandate. But there can be no doubt that, if necessary, we can and will design and deploy tools new to secure monetary policy transmission and then our primary mandate for price stability,” Schnabel said on Tuesday.

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