The ECB announced that it tasked the “relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.”
What such an instrument will eventually look like remains unclear. To make things even more complicated, it will be hard for the ECB to present new asset purchases so soon after it announced the actual ending of existing asset purchase programmes. Consequently, the only way out seems to be a programme that is tailor-made to tackle the unwarranted widening of spreads with certain conditions attached, as was the case with the OMT.
What the ECB didn’t address today, however, is the issue of forward guidance. The current problem in financial markets is not only the widening of spreads but also the more general increase in rates. And the latter is also the result of the ECB’s forward guidance from last week, opening the door to a series of rate hikes beyond the intended and expected normalisation of rates over the summer.
All in all, this is not the first time that the ECB has been overtaken by market developments. The March 2020 experience should have been more prominent in the ECB’s institutional memory. Looking ahead, we still expect the ECB to hike interest rates by 25bp in July and 50bp in September with another 25bp hike in the winter. Also, the July meeting is now likely to bring more details on an anti-fragmentation programme.
-ING
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