MNI BRIEF: New Tool Will Aid Future Rate Rises - ECB's Lagarde

Any ECB new anti-fragmentation must be effective, proportionate and contain “sufficient safeguards to preserve the impetus of Member States towards a sound fiscal policy,” president Christine Lagarde said in a speech Tuesday, with the right transmission mechanism allowing rates to rise as far as necessary throughout the eurozone.

“Measures to preserve transmission could be used at any level of interest rates – so long as they were designed not to interfere with the monetary policy stance,” she said. “Preserving policy transmission throughout the euro area will allow rates to rise as far as necessary. In this sense, there is no trade-off between launching this new tool and adopting the necessary policy stance to stabilise inflation at our target. In fact, one enables the other.”

Flexibility, gradualism and optionality remain at the core of the ECB's approach to monetary policy normalisation, Lagarde said. But there are clearly conditions in which gradualism would not be appropriate, she added, including higher inflation that could de-anchor inflation expectations.