MNI BRIEF: ECB's New Crisis Tool To Ensure Policy Transmission

The European Central Bank's new Transmission Protection Instrument will help the Governing Council to deliver on its price stability mandate, but the flexible reinvestment of maturing PEPP holdings will remain the first line of defence against any fragmentation of sovereign bond yields that threaten the effectiveness of monetary policy across the eurozone, the central bank announced Thursday.

Under the new tool, the Eurosystem can make secondary market purchases of securities issued in 'jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals', providing established criteria are met. Purchases would be focused on public sector securities with a remaining maturity of between one and ten years.

Many of the parameters of the new tool were left undefined, being laid out as a final decision by the Governing Council. The skeleton plan was laid out by President Christine Lagarde on the day policymakers surprised financial markets with a larger than expected 50 bps hike across their interest rate suite.