MILAN (Reuters) – Italy’s borrowing costs are unreasonably high, so the European Central Bank’s support for moderating yields on the bloc’s periphery is fully justified, the central bank chief said on Thursday. Italian Ignazio Visco.
ECB policymakers agreed at an emergency meeting on Wednesday to design a new instrument to prevent excessive divergence in government borrowing costs across the 19-nation currency bloc. They will also direct cash into bonds of more indebted eurozone countries as assets purchased under the ECB’s recently closed €1.7 trillion pandemic support program mature.
“A yield differential on Italian and German 10-year bonds of less than 150 basis points would be justified by fundamentals,” Visco told a conference. “Levels above 200 points are definitely not.”
The Italian-German spread peaked at around 250 basis points this week before declining to around 212 basis points on Thursday following the ECB’s pledge.
Italy’s benchmark 10-year bond yielded 3.97% on Thursday, down from 4.27% days earlier when the ECB said high inflation will necessitate rate hikes in July and September, before subsequent moves later.
Visco said that even if the ECB bought additional bonds under a new tool, it would not need to sell other assets to “sterilize” the impact of its policy measures.
Pushing back against a media report that any additional purchases would imply the sale of other securities, Visco said the ECB had all the tools to control liquidity, including through reserve requirements and market tools.
Central banks use sterilization when they want to offset the impact of market activity so that the overall policy direction is not affected.
Visco said the conditions attached to the ECB’s planned spread-fighting tool should relate to checking orderly economic fundamentals.
“One can imagine a set of conditions linked to the achievement of certain public finance objectives, the National Recovery and Resilience Plan or the revised Stability and Growth Pact,” he said.
Visco pushed back on the suggestion that the ECB was now tailoring its policy specifically for Italy, which would be prohibited by EU rules.
“They (the ECB’s instruments) have purely monetary objectives, aimed at pursuing our price stability,” Visco said. “They serve no other purpose, much less fund reckless and unsustainable fiscal policies.”
The ECB has argued that excessive borrowing costs in parts of the bloc would hurt the transmission of its policy, punishing some members in ways not justified by their economic fundamentals.
(Reporting by Francesco Canepa; Writing by Balazs Koranyi; Editing by Catherine Evans)