World News

ECB ready to do more to avoid euro ‘fragmentation’: Schnabel

By Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank is ready to do more to avoid financial fragmentation in the euro zone, ECB board member Isabel Schnabel said on Thursday, as debt-laden, coronavirus-stricken countries see their borrowing costs climb in bond markets.

Italy and other southern European countries have seen the gap between their government bond yields and those of safe-haven Germany widen in the last two weeks despite heavy buying by the ECB as part of its response to the pandemic.

Investors have been worrying about these countries’ ballooning government debt burdens after their demands for joint bond issuance at a euro-zone level were turned down.

Schnabel, who heads the ECB’s market operations that include its bond purchases, said the central bank wasn’t prepared to give up on its efforts to avoid fragmentation, although it also expected other policymakers to play their part.

“(The ECB) stands ready to adjust all of its instruments as needed … to avoid fragmentation that may hamper the smooth transition of our monetary policy,” she said during a webinar.

She added that the ECB and the euro zone’s 19 central banks that carry out the purchases were being as flexible as possible when deciding which assets to buy – a likely reference to the oversized purchases of Italian debt seen in March.

Schnabel also said that euro area inflation, which the ECB uses as its official target, was set to fall “quite a bit” in the short term but that concerted action by global authorities was giving some ground for hope.

She cited private-sector forecasts showing inflation slowly converging to the ECB’s target of close but below 2% in the coming years.

“There is tentative evidence that the fast and resolute policy action by authorities worldwide and by central banks in particular have already contributed to restoring a cautious confidence among professional forecasters,” Schnabel said.

Speaking to fellow policymakers from across the world, ECB President Christine Lagarde was even more cautious, warning of an imminent hit to the euro zone economy and an uncertain future.

“Incoming economic data, particularly recent survey results, have started to show unprecedented falls, pointing to a large contraction in output in the euro area,” Lagarde told a virtual meeting of the International Monetary and Financial Committee.

“Uncertainty is sharply elevated and will remain high, making it extremely difficult to predict the likely extent and duration of the imminent recession and subsequent recovery,” she added.

(Reporting by Francesco Canepa; Editing by Alison Williams and Hugh Lawson)

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