New “nonsense” ECB bond buying tool: strategist

The European Central Bank raised interest rates for the first time in more than a decade on Thursday, boosting its benchmark interest rate by half a percentage point.

At the same time, the central bank introduced a new flexible bond-buying program called the Transfer Protection Instrument, or TPI.

The latter is an attempt to mitigate the volatility caused by the central bank’s variable exchange rate policy. The subtraction caused some confusion in the markets, as the euro rose to 1.0281 against the dollar before falling back to trade little changed against the dollar.

All this leaves some investors wondering about the seemingly contradictory actions of the European Central Bank.

“It really doesn’t make sense,” Matt Miskin, co-head of the investment office at John Hancock Investment Management, said of the ECB’s new policy approach.

“Quantitative easing is easing and raising interest rates,” Miskin told Yahoo Finance Live in an interview. “They’re basically trying to do two things at the same time, which doesn’t make sense.” The TPI is what is referred to as “quantitative easing,” which is an additional set of tools that central banks use to ease monetary policy.

European Central Bank President Christine Lagarde said purchases using the so-called crisis tool would only be for government debt, and that the central bank would only make them when it deemed necessary.

European Central Bank President Christine Lagarde attends a press conference following the European Central Bank’s monetary policy meeting, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattei

“The Governing Council’s decision to revitalize the TPI will be based on a comprehensive assessment of market and transmission indicators, an assessment of eligibility criteria and judgment that revitalization of procurement under the TPI is commensurate with the core ECB investigation,” she said at a press conference.

Lagarde also refused to commit to using TPI to back Italian bonds, which were sold after Mario Draghi resigned as prime minister. Indeed, the Italian political crisis and the state of natural gas prices in Europe – which depends in part on the Russian-controlled Nord Stream II pipeline – continue to “dominate expectations” for markets, Krishna Guha, vice president of Evercore ISI, wrote in a note in response to the Italian political crisis. for the European Central Bank’s decision.

Having said that, Guha wrote that the central bank’s new tools are a positive development: “With the ECB’s interest rate index now a full set of tools with which to manage rates and spreads.”

For his part, Maskin believes that both the European Central Bank and the Federal Reserve will have to cut interest rates before long, as their focus shifts to combating deteriorating economic growth. “We believe they are raising interest rates just to lower them again in the next six to twelve months,” he said of the ECB.

As for the Fed, Maskin said: “Next year they will devote themselves to solving the problem of unemployment and not inflation, and we believe that this will be a huge pivot that will extend through the bond market until 2023.”

Julie Heyman is a broadcaster Yahoo Finance Live, weekdays 9 a.m. to 11 a.m. ET. Follow her on Twitter Tweet embedAnd the read Her other stories.

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