Reuters: The Bundesbank reacts to the ECB’s plan to support the countries of the South

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Bundesbank President Joachim Nagel hit back at the European Central Bank’s promise to offer fresh support to heavily indebted southern countries at last month’s emergency meeting, rekindling the rift between the ECB and its biggest shareholder, sources told Reuters.

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ECB policymakers pledged to buy more bonds from indebted countries at an unscheduled meeting on June 15 to contain the widening spread between those countries’ borrowing costs and Germany, as the central bank prepares to raise interest rates.

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But Nagel disagreed with that decision, arguing that the ECB’s focus should instead be on fighting high inflation, the sources told the news agency.

The June 15 meeting was called with just a few hours’ notice, meaning ECB members did not have much time to review the preparatory documents and not all could attend, the sources said.

ECB members who have spoken after the meeting, including Belgium’s Wunsch and Holland’s Knot, two of the bank’s “aggressive” members, have backed President Lagarde’s commitment to fight fragmentation.

This meant that Nagel’s opposition was unlikely to be a significant obstacle. But it was the first visible disagreement between Nagel and Lagarde since he took office in January.

The Bundesbank has for years been the biggest critic of the ECB’s loose monetary policy under Nagel and Lagarde’s respective predecessors, namely Weidmann and Draghi.

Lagarde and Nagel have since tried to smooth over the disagreements, with the former giving central bank chiefs a greater say in policy meetings and the latter avoiding publicly criticizing the decisions.

But Germany’s central banker has come under pressure at home over the highest rate of inflation since the 1970s, and a sense that ECB policy is designed to support indebted countries like Italy and Greece, rather than keep them prices under control.

The ECB is trying to narrow yield spreads by using proceeds from maturing bonds in Germany and other northern European states to buy more Italian, Greek, Spanish and Portuguese bonds.

It is also working on a new instrument to buy even more bonds of southern European countries with new money.

Source: Capital

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