ECB’s new tool gives it green light for faster normalisation – ABN Amro

Nick Kounis, Head of Financial Markets and Sustainability Research at ABN Amro, outlined the key features of the ECB's new Transmission Protection Instrument (TPI), designed to fight against excessive widening of spreads.

Key Quotes:

Subject to conditions 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. 

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 with a remaining maturity of between 1-10 years. Purchases of private sector securities could be considered, if appropriate. The Eurosystem will accept the same (pari passu) treatment as private or other creditors.

The eligibility criteria include compliance with the EU fiscal framework, absence of severe macroeconomic imbalances, public debt sustainability and sound and sustainable macroeconomic policies.

The ECB will avoid potential interference with the appropriate monetary policy stance by addressing the implications of the TPI purchases for the scale of the aggregate Eurosystem monetary policy debt security portfolio, and the amount of excess liquidity. This implies the programme will be sterilised.

PEPP reinvestment flexibility will continue to be the first line of defence to counter risks to the transmission mechanism.