ECB boss queried on 'fragmentation' risks

European Central Bank boss was grilled by journalists about potential fragmentation risks in the euro area after the Governing Council announced its decision to stop asset purchases and to signal the start of an interest rate hiking cycle from July.

The concern in financial markets appeared to be that the mix of fewer sovereign bond purchases, higher inflation still and lower economic growth combined might put undue stress on the public finances of some members of the single currency bloc.

However, Lagarde was adamant, saying that the ECB would not tolerate fragmentation as it would impair the proper transmission of monetary policy.

She also pointed out that the monetary authority stood ready to re-deploy the instruments needed to forestall such risks, including through the creation of new policy facilities.

At one point during the post-meeting press conference, the central banker also pointed that fully three-quarters of the overshoot in inflation was the result of energy price rises.

And the ECB would do its job, telling journalists "we will deliver" so that inflation expectations should remain anchored.

In the days running up to the ECB's policy meeting, some observers had aired those same doubts.

Most poignantly, just hours before the ECB announced its latest policy decision, Italian Prime Minister, Mario Draghi, formerly the head of the ECB, had appeared to caution against moving too quickly on monetary policy.

In that regard, Lagarde also called attention to the fact the ECB's Asset Purchase Programme would cease making net purchases on 1 July, but would fully reinvest the principal from maturing securities for an "extended period" after the first rate hike.

Similarly, reinvestments under the Pandemic Emergency Purchase Programme were set to run "at least" until the end of 2014, meaning that debt markets would continue to receive support.

The ECB also left the door open to readjusting the reinvestment of its maturing PEPP assets "in the event of renewed market fragmentation related to the pandemic."

Also worth noting, the latest projections from Eurosystem staff for euro area CPI, while revised higher, still pointed to a substantial slowdown in price pressures as soon as 2023.

Commenting on the ECB's policy decision, Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, told clients: "One downside risk, therefore, is that this policy tightening cycle, after the first few hikes, comes when the economy is weakening rapidly and, possibly, inflation may be turning from high levels.

"Another risk is the possible return of political risk premium and debt sustainability issues in Italy with, potentially, some contagion to other vulnerable members of the monetary union."