European Central Bank to discuss market defeat in an unscheduled meeting

FRANKFURT (Reuters) – The European Central Bank’s policy-making board will hold a rare, unscheduled meeting on Wednesday to discuss turmoil in bond markets, underscoring official concern about an explosion in borrowing costs for some euro zone countries.

Bond yields have risen sharply since the European Central Bank promised a series of interest rate increases last Thursday, and the spread between German bond yields and those of the most indebted southern countries, especially Italy, rose to its highest level in more than two years.

An ECB spokesman said: “The Governing Council will hold a special meeting on Wednesday to discuss current market conditions.”

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The meeting had been scheduled for 0900 GMT but it was not yet clear whether a statement would be published or not, several people familiar with the matter said.

Invitations to the meeting were sent out on Tuesday and some policymakers, who were expected to attend a conference in Milan on Wednesday, canceled their appearances.

The last time the European Central Bank held an off-plan meeting during market pressures, it rolled out the Pandemic Emergency Purchase Program, a 1.7 trillion euro ($1.78 trillion) bond-buying scheme that has proven to be its main tool during the COVID-19 pandemic.

Options for the ECB to combat so-called retail risk – when some countries face significantly higher borrowing costs than others in the same currency bloc – include directing reinvestments from maturing bonds to stressed markets or inventing an entirely new instrument. However, some analysts warned that reinvestment alone is unlikely to be enough. Read more

The discussion comes on the same day that the US Federal Reserve is expected to raise interest rates, as investors dramatically raise their bets for a 75 basis point increase, a swing in expectations that led to a violent sell-off in global markets. Read more

News of the European Central Bank meeting sent the euro up more than half a percent to 1.0487 against the dollar, Italian 10-year bond yields fell 22 basis points and Italian stock futures rose sharply.

Earlier, German 10-year bond yields, the benchmark for the 19-nation currency union, hit 1.77%, the highest level since early 2014 while their Italian counterparts jumped 240 basis points, the largest spread since early 2020.

ECB Governing Council member Isabelle Schnabel, the bank’s head of market operations, said on Tuesday that the ECB was monitoring the situation “closely” and was ready to deploy existing and new instruments if it found market re-pricing was “disorderly”. Read more

“We will not tolerate changes in financing terms that go beyond fundamentals and threaten the transmission of monetary policy,” Schnabel said, adding that there are no limits to its commitment to prevent fragmentation.

She argued that as a first line of defense, the European Central Bank could deploy cash from maturing bonds in stressed markets and, if necessary, the bank could devise a new instrument.

But Schnabel argued against preemptive advertising for a tool because it would need to be adapted to a particular situation with terms, limits, and guarantees set on a case-by-case basis.

“We’re talking now. We’re just talking, but it’s a start,” said Frederic Ducruzette, an economist at Pictet Wealth Management.

“We’ll have to get a statement along the lines of reflecting the desire to act, and then maybe they’ll also assign committees to work on options, and that’s what’s been missing in the last week,” Ducruzette added.

(1 dollar = 0.9542 euros)

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(Report) Submitted by Balaz Kourani, Francesco Canepa and Frank Sebelt; Editing by Jacqueline Wong, Sam Holmes, Carmel Kremens and Tomasz Janowski

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