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G. Stournaras in Bloomberg: The ECB’s new tool may not need to be used

European Central Bank Governing Council member Giannis Stournaras said the new tool in the works to contain the turmoil in debt markets as interest rates rise may not need to be used if it is strong enough to convince investors to don’t try it.

In an interview Saturday on Bloomberg Television in Aix-en-Provence, France, Stournaras said there was a “very good discussion” going on about the instrument, expressing his belief in a “consensual, effective solution ” which he hopes will surprise the markets “positively”.

“I think the idea is very likely that if we convince the markets that it will be a powerful tool, we might not need it,” the Bank of Greece governor said. “We’ll have it on the shelf. That’s the good scenario.”

Facing record inflation, ECB officials preparing for a series of rate hikes are also scrambling to ensure there is no backlash in the bond markets of the eurozone’s most vulnerable members.

After Italian government bond yields jumped in June, they have accelerated work on the so-called anti-fragmentation tool, which policymakers have so far called the Transmission Protection Mechanism.

Mr Stournara’s comments bring to mind the ECB’s Outright Monetary Transactions (OMT) program that followed former president Mario Draghi’s famous pledge to do “whatever it takes” to keep the eurozone together amid a sovereign debt crisis. In that case, his words were convincing enough that OMT was never used.

While officials are not yet sure the new tool will be ready for their decision on July 21, according to people familiar with the matter, Mr Stournaras was more optimistic. But he declined to go into detail about what conditions eurozone members might have to meet to be eligible for aid.

He underlined, however, that the instrument is necessary, in the absence of wider reforms of the European Union.

“We may have episodes of fragmentation not because of policies, but simply because we are an imperfect economic and monetary union,” he said. “We have to fix that, but until that happens the ECB has to take this mechanism into account.”

The ECB’s plan to raise the deposit rate by a quarter of a point this month is “very likely” to happen, he said. With a bigger one planned for the next meeting, in September, Mr Stournaras said “we will see what the data says on both the inflation front and the economic activity front”.

It sees price growth starting to slow towards the end of the year and approaching the medium-term target of 2% in 2024. It is currently more than four times above that level.

“I won’t be able to tell you where it will peak because that depends on external factors that cannot be measured by the models,” said Mr Stournaras. “Maybe it depends on geopolitical considerations.”

The rate hikes would coincide with a slowdown in the 19-member eurozone economy – which may yet turn into a recession. Forecasts for a contraction are rising as the prospect of a Russian power outage this winter becomes more real. ING warned that the recession is coming regardless.

“There are stagflationary winds blowing – there’s no doubt about that,” Mr Stournaras said, stressing that Europe is not yet seeing stagflation. “But for now we don’t expect negative growth this year or next year.”

Source: Capital

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