SINTRA, Portugal (Reuters) – The European Central Bank’s upcoming bond-buying programme will rein in rising borrowing costs for vulnerable euro zone countries while keeping the pressure on their governments to repair their budgets, the ECB’s President Christine Lagarde said on Tuesday.
With the ECB closing in on its first interest rate hike in over a decade, bond yields for Italy and other indebted countries have surged and the spread they pay over safe-haven Germany widened.
This has spurred the ECB to speed up work on a new, yet to be unveiled, bond-buying programme.
Lagarde’s comments suggested this new scheme was likely to come with some strings attached for countries that benefit from it, as sources told Reuters earlier this month.
“The new instrument will have to be effective, while being proportionate and containing sufficient safeguards to preserve the impetus of member states towards a sound fiscal policy,” Lagarde told the ECB’s annual forum in Sintra, Portugal.
Sources told Reuters these conditions would be relatively light, such as complying with the European Commission’s economic recommendations that countries already have to abide by to secure funding from the European Union.
The sources have also said the ECB would likely drain cash from the banking system to offset the new bond purchases, so as not to increase the overall amount of liquidity.
With the ECB set to raise interest rates for the first time in a decade next month, Lagarde hinted at small increments, “but with the option to act decisively”.
“This means moving gradually if there is uncertainty about the outlook, but with the option to act decisively on any deterioration in medium-term inflation, especially if there are signs of a de-anchoring of inflation expectations,” she said.
The ECB has said it would raise its interest rates by 25 basis points on July 21 but opened the door to a bigger move in September unless its medium term inflation forecasts are cut back to its 2% target.