ECB’s Stournaras says ‘strong’ crisis tool could stay on the shelf

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European Central Bank Governing Council member Yannis Stournaras said a new tool to keep debt market turmoil at bay as interest rates rise might not need be used if it is powerful enough to persuade investors not to test it.

In an interview with Bloomberg Television on Saturday in Aix-en-Provence, France, Stournaras said there was a « very good debate » going on about the instrument, expressing his confidence in a « consensual and effective solution » that would , he hopes, will surprise the markets « on the positive side ». side. »

“I believe there is a lot of truth in the idea that if we convince the markets that this is going to be a powerful tool, we may not need it,” the Bank of Greece governor said. . “We’ll have it on the shelf. It’s the right scenario. »

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Struggling with record inflation, ECB officials brace for a series of rate hikes are also racing to ensure there is no negative backlash in the bond markets of the most vulnerable members of the the euro zone.

Since a jump in Italian government yields in June, they have accelerated work on the so-called anti-fragmentation tool, which policymakers have so far called the transmission protection mechanism.

Stournaras’ comments are reminiscent of the ECB’s monetary securities transaction program that followed former President Mario Draghi’s famous promise to do « whatever it takes » to keep the eurozone together amid a sovereign debt crisis. In this case, his words were convincing enough that the OMT was never used.

While officials aren’t yet sure the new instrument will be ready for their July 21 decision, according to people familiar with the matter, Stournaras was more optimistic. But he declined to go into specifics about the conditions eurozone members might have to meet to be eligible for the aid.

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

“We might have episodes of fragmentation not because of policies, but simply because we are an imperfect economic and monetary union,” Stournaras said. « We should fix that, but until that’s done the ECB needs to consider the transmission mechanism. »

The ECB’s plan to raise the deposit rate by a quarter point this month is « very likely » to materialize, he said. With a bigger pencil for the next meeting in September, Stournaras said « we’ll see what the data says both on the inflation front but also on the activity front. »

He 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 that level.

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« I won’t be able to tell you where it will peak because it depends on exogenous factors that cannot be measured by models, » Stournaras said. « It may depend on geopolitical considerations. »

The rate increases would coincide with a slowdown in the 19-member eurozone economy, which could yet turn into a recession. Predictions of a contraction are mounting as the prospect of a Russian energy cut this winter becomes increasingly real. ING warned that a downturn is ahead regardless.

« There are stagflationary winds blowing – there’s no doubt about that, » Stournaras said, pointing out that Europe is not yet experiencing stagflation. « But at the moment we don’t expect negative growth this year or next year. »