The ECB jacked up interest rates, the Italian PM quit and triggered an election - and bond markets reeled. The risk of a new eurozone crisis is growing.
as Italian prime minister, the European Central Bank jacked up interest rates by an unexpectedly hawkish 0.5 of a percentage point, and traders sold off Italian bonds.
Mr Mattarella urged the country’s feuding political parties to work with the outgoing government to tackle Italy’s multi-headed crisis, which spans surging inflation and energy prices, slowing growth and soaring public debt.“The time we live in does not allow us to pause in the crucial government action,” he said.
The ECB will buy under-pressure Italian government bonds, to ensure that movements in the sovereign bond markets do not end up giving eurozone monetary policy a different impact in different countries. The ECB was forced into a larger than expected interest rate increase on Thursday after belatedly accepting that even transitory and externally driven inflation, caused by surging energy prices and supply chain issues, could fuel self-fulfilling increases in inflation expectations.
“Whilst the governing council has shown it can be nimble, without proper forward guidance it could become hard for the market to determine what actions the ECB will take in future. This may bring volatility in coming months,” he said.The most pressing issue for the ECB, however, is whether and when it will have to intervene in Italy’s sovereign debt market,
Analysts worry that the ECB will have to pour good money after bad in trying to contain the Germany-Italy spread, if the root cause is Italy’s political and fiscal mismanagement. That creates uncertainty over whether the bank will be able stick with the TPI.The ECB said any secondary-market purchases of Italian bonds would take place only when there was “a deterioration in financing conditions not warranted by country-specific fundamentals”.
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