The European Central Bank has revealed details of its latest bond-buying intervention mechanism as it seeks to ensure its first tightening cycle in more than a decade doesn’t cause heightened stress in the bloc’s debt markets. But investors hoping the program would be deployed swiftly to underpin Italian assets amid a fresh bout of political turmoil in Rome may be disappointed, say analysts.
“The new tool…will only be used sparingly, as a backstop, and only at much higher spread levels that we are currently seeing,” said Jens Eisenschmidt, chief European economist at Morgan Stanley. The new Transmission Protection Instrument (TPI) “is necessary to support the effective transmission of monetary policy, said the ECB. “In particular, as the Governing Council continues normalising monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries”. The move towards ‘normalization’ accelerated on Thursday when the ECB raised borrowing costs by a bigger-than-forecast 50 basis points to zero percent, as it sought to combat record eurozone inflation, currently running at 8.6%. Highly indebted countries’ such as Italy and Greece have already seen their government bond yields surge in recent months in anticipation of policy tightening. But ECB President Christine Lagarde is worried that yields may move beyond the levels justified by economic conditions, potentially delivering another eurozone debt …