© Reuters. FILE PHOTO: The European Central Bank (ECB) main building in Frankfurt, Germany, March 7, 2018. Photo: Ralph Orlowski/Reuters
FRANKFURT (Reuters) – European Central Bank policymaker Olli Rehn said on Saturday that the European Central Bank should limit the high cost of borrowing from highly indebted members of the euro zone, but it would not solve its debt problems or let financial concerns dictate monetary policy.
At an emergency meeting this week, the European Central Bank decided to direct bond reinvestment to help countries on the bloc’s southern edge and develop a new tool to stem the divergence in borrowing costs.
Finnish central bank governor Rehn said at an event organized by the Federal Reserve in Dallas that the ECB’s actions would only go so far as to prevent “unwarranted” market moves and would not help countries in the event of deep debt problems.
“We are fully committed to preventing financial dominance — and/or financial dominance for that matter,” Ren said, referring to a situation where central bank policy is dictated by financial rather than monetary considerations.
“In the event of deeper structural economic vulnerabilities and debt sustainability issues, there is always an opportunity to trigger direct cash transactions.”
OMT, an emergency debt purchase program, can only be activated if a country participates in the economic adjustment programme, a politically unpopular option since the bloc’s debt crisis a decade ago.
Borrowing costs have risen sharply around the world this year as rising inflation forces central banks to raise interest rates to prevent rapid price growth from taking hold.
Italy is among the most vulnerable in the bloc, with total debt hovering around 150% of GDP, and the European Central Bank getting into action this week as 10-year borrowing costs soar, outpacing Germany by 250 basis points.
Ren said the assistance to individual members will only go so far as to ensure that monetary policy is transmitted throughout the bloc and inflation is brought under control.
“While monetary-fiscal interaction is an essential feature of policy coordination in a monetary union such as the eurozone, it should not conflict with the independence of the central bank,” he said.
The European Central Bank promised to raise interest rates in July and September, and said further steps were also likely to help combat high inflation.