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ECB announces plan to fix widening bond spreads

The European Central Bank took steps on Wednesday to address surging borrowing costs in the weaker eurozone economies, announcing that it’s speeding up work on a new “anti-fragmentation” instrument and allowing extra flexibility in how it uses the proceeds of its pandemic-era bond buying program.

“The Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism,” the ECB said in a statement, referring to the bond-buying program.

This would give the central bank more latitude in how it invests the proceeds of the bonds that will mature in the €1.7 trillion bond portfolio, which the central bank hoovered up to lift the eurozone out of the pandemic recession by dramatically lowering borrowing costs.

“The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalization of our monetary policy across jurisdictions,” it said.

With the ECB set to raise rates in July and September, eurozone countries have seen an increase in their 10-year bond yields, with some member states, like Italy, having to pay a significant premium over the effectively risk-free 10-year German bond. This widened spread had alarmed the ECB, which called an extraordinary meeting this morning to address the problem.

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