Negative Rates in Europe Were a Failure, Now What?

In an unexpected move, ECB president Christine Lagarde Raised Rates by a Bigger-Than-Expected 50 Fifty Basis Points, all the way to zero.

The European Central Bank announced a larger-than-expected half-percentage point interest-rate increase and unveiled a new plan to buy the debt of Europe’s most vulnerable economies, taking bold action to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth.

It also said it had created a new bond-buying program, known as the Transmission Protection Instrument, which is aimed at ensuring the bank’s interest rates are transmitted smoothly across all countries of the currency union. The new tool “can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area,” the ECB said.

The decision sent European markets swinging. The euro initially surged before reversing its gains and turning lower to lose 0.1% against the dollar. It most recently traded at $1.1017.

Transmission Protection Instrument

Please consider details of the Transmission Protection Instrument straight from the ECB's mouth.

The Governing Council today approved the Transmission Protection Instrument (TPI). The Governing Council assessed that the establishment of the TPI is necessary to support the effective transmission of monetary policy. In particular, as the Governing Council continues normalising monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The singleness of the Governing Council’s monetary policy is a precondition for the ECB to be able to deliver on its price stability mandate.

The TPI will be an addition to our toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. By safeguarding the transmission mechanism, the TPI will allow the Governing Council to more effectively deliver on its price stability mandate.

Subject to fulfilling established criteria, the Eurosystem will be able to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals, to counter risks to the transmission mechanism to the extent necessary. The scale of TPI purchases would depend on the severity of the risks facing monetary policy transmission. Purchases are not restricted ex ante.

TPI purchases would be focused on public sector securities (marketable debt securities issued by central and regional governments as well as agencies, as defined by the ECB) with a remaining maturity of between one and ten years. Purchases of private sector securities could be considered, if appropriate.

The Governing Council will consider a cumulative list of criteria to assess whether the jurisdictions in which the Eurosystem may conduct purchases under the TPI pursue sound and sustainable fiscal and macroeconomic policies. These criteria will be an input into the Governing Council’s decision-making and will be dynamically adjusted to the unfolding risks and conditions to be addressed.

Exceeds ECB Legal Mandate 

Buy private sector debt? Really?

I am confident this exceeds the ECB's legal mandate, but no one seems to care about such matters these days.

This is an illegal power grab designed to bail out peripheral Europe, especially Italy, Greece, Spain, and Portugal. 

The ECB's move highlights a fundamental flaw of the Eurozone. There is no single interest rate that makes sense for widely diverse countries with different work rules, pension plans, and productivity.

The TPI is another band-aid on a dysfunctional system that is ultimately doomed to failure.

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