ECB finalises ‘anti-fragmentation’ tool to calm markets

ECB finalises ‘anti-fragmentation’ tool to calm markets

The mechanism will flexibly apply the reinvestment of maturing debt in the portfolio obtained under the financial institution’s anti-epidemic plan.

The Governing Council of the European Central Bank (ECB) decided to apply flexibility in the reinvestment of its maturing debt portfolio corresponding to the Anti-epidemic Program (PEPP) and ordered the accelerated design of a “new anti-epidemic program”. Fragmentation tools”for review by central banking institutions.

At the conclusion of an emergency meeting of the Governing Council on Wednesday, the ECB’s Governing Council met to discuss market conditions following a strong rise in yields required for euro zone bonds, with the ECB Governing Council reaffirming its commitment to addressing risk diversification.

In this sense, he acknowledges that the pandemic has left enduring vulnerabilities in the euro area economy, which has, in fact, led to uneven transmission of monetary policy normalization across jurisdictions.

Flexibility as the answer
In this way, the Governing Council decided to apply flexibility to the reinvestment of overdue repayments in the PEPP portfolio in order to maintain the functioning of the monetary policy transmission mechanism, a prerequisite for the ECB to be able to fulfil its price stabilization mandate.

Likewise, the ECB’s governing body decided to instruct the relevant Eurosystem committees, as well as the ECB’s services, “to expedite the completion of the design of new anti-fragmentation tools for review by the Governing Council”.

What is the European Central Bank’s Pandemic Plan (PEPP)?
When the coronavirus pandemic broke out and restrictions became necessary, the European Central Bank launched the Pandemic Program (PEPP) as a response to minimize the resulting economic consequences. In the words of the financial institution itself, PEPP is nothing more than an emergency purchase program designed to provide individuals and companies with access to affordable financing.

How does PEPP work?
Broadly speaking, the program empowers the ECB to acquire different types of assets in financial markets. Under this premise, the triggering effect is that the asset price rises and the market interest rate falls. The main idea is that this approach makes it easier for people, companies and governments to borrow more cheaply. At the same time, it makes it easier for those who make loans to obtain payments, maintaining the economy’s liquidity standards in terms of liquidity of credit, spending and investment.

Why are PEPP keys flexible?
It is no coincidence that the ECB responded flexibly on Wednesday, given that this is the backbone of PEPP support. In order to be able to react nimbly to any sudden changes in the market, CFOs define this characteristic in this way: “It means the moment we buy, the assets we acquire and the countries we buy in. This makes us able to direct our procurement to maintain favourable financing conditions for euro area citizens.”

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