No limits in ECB’s fight against fragmentation -Schnabel

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FILE PHOTO: Illumination at ECB headquarters for the Euro's 20th anniversary in Frankfurt, Germany

FRANKFURT -The European Central Bank will fight any “disorderly” blowout in the borrowing costs of more indebted euro zone nations, but its response should be tailored and there is no need to pre-announce a new tool, ECB board member Isabel Schnabel said on Tuesday.

The ECB last week said it would not tolerate fragmentation that would impair monetary policy but failed to outline the tools it would use, spooking investor who then sold off Italian debt, raising debt sustainability questions.

“There can be no doubt that, if and when needed, we can and will design and deploy new instruments to secure monetary policy transmission and hence our primary mandate of price stability,” Schnabel, the head of the ECB’s market operations, said in a speech in Paris.

“Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits,” she said.

Worried by what some see as complacency on the part of the ECB, investors have sold off bonds from the bloc’s periphery since last week’s policy decision and the spread between 10-year German bonds and their Italian counterpart rose to 253 basis points on Tuesday, the largest gap since early 2020.

Schnabel said the ECB was closely monitoring market developments, but noted that the ECB’s main job now was tackling unacceptably high and persistent inflation, which risked becoming entrenched in expectations.

The ECB’s first line of defence to contain spreads will be the cash from maturing bonds in its massive portfolio. Then it could roll out new instruments in a very short period of time, if needed, Schnabel said.

“These tools might again look different, with different conditions, duration and safeguards to remain firmly within our mandate,” Schnabel said, arguing that any response would depend on the actual market situation.

Pictet Wealth Management economist Frederik Ducrozet said that Schnabel’s hints on Tuesday suggested that an ECB backstop may be coming and her words bolstered the bank’s credibility.

“What matters is credibility, and Isabel Schnabel just sent a strong signal today,” Ducrozet said on Twitter.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Alex Richardson)