ECB wants to concretise plans to ward off stress in the bond market
Council members are expected to commit to counteracting any turbulence triggered by higher interest rates
Ibrahim Al-TarikMay 9, 2025
The European Central Bank (ECB) is set to step up its commitment to supporting bond markets in vulnerable euro-zone countries this week should they be hit by a sell-off as policymakers prepare to raise interest rates for the first time in more than a decade.
Most of the 25 members of the ECB's Governing Council are expected to back a proposal to create a new bond-buying program should that be needed to prevent borrowing costs for member states like Italy from spiraling out of control, according to several at the discussions people involved.
Even without a new program, the ECB already has an additional 200 billion euros available for the purchase of stressed government bonds as part of its existing bond purchase program. This €200 billion would be achieved by bringing forward the reinvestment of maturing assets by up to a year.
Monetary officials, who meet in Amsterdam on Wednesday and Thursday, are likely to bicker over when to stop buying more bonds. Some want to call for a halt to buying as early as Thursday, several weeks ahead of schedule, although they concede that only a minority will support the idea.
The bank is under pressure to respond to record-breaking inflation but has lagged behind its US and UK counterparts in tightening monetary policy. Many of the hawks on the council have accepted that they need to provide more support to bond markets to pave the way for a more aggressive rate hike.
Almost all Council members accept that the ultra-loose monetary policy they have been pursuing for over a decade must end. A hike of at least 25 basis points will almost certainly come at the next ECB meeting on July 21st. The deposit rate is currently minus 0.5 percent.
Citizens in the region are facing a rise in the cost of living, exacerbated by Russia's invasion of Ukraine. Consumer prices in the euro zone rose 8.1 percent in the year to May - four times the ECB's target of 2 percent and double the previous high since the single currency was launched in 1999 - forcing governments to pay subsidies cushion the impact of higher energy and food prices on households.
However, some are concerned about the impact of interest rate hikes on markets and are calling for a firmer commitment to launch a new asset purchase program to stem unjustified increases in borrowing costs for heavily indebted countries.
ECB President Christine Lagarde said in a blog last month: "If necessary, we can develop and deploy new tools to ensure monetary policy transmission while we move down the path of policy normalization, as we have done for many in the past have shown opportunities."
Several Council members called for similar wording to be included in Thursday's statement, which builds on the pledge made after the April meeting to remain flexible if the price stability target is at risk "under stressed conditions".
The spread between German and Italian 10-year government bond yields - a closely watched gauge of financial strain in the eurozone - widened last week to its highest level since the sell-off in southern European bond markets at the start of the pandemic in 2020.
The central bank has previously said its ongoing program of asset purchases, worth €20 billion a month, would not end until early July and it would only consider raising interest rates "some time" after that.
Policymakers, who are set to call for an immediate end to additional asset purchases this week, believe that pursuing policies to boost inflation is no longer justified. Others insisted it was more credible to stick with the plan to continue bond purchases until early July. The ECB declined to comment.
Carsten Brzeski, head of macro research at ING, said bringing the end of asset purchases forward by a couple of weeks would be "a definite hawkish surprise" and could even open the possibility of a rate hike ahead of the July 21 meeting.
Since launching its quantitative easing program to combat the twin threats of deflation and the sovereign debt crisis in 2014, the ECB has bought bonds totaling more than €4.9 billion, equivalent to more than a third of the eurozone's gross domestic product.
Over the past two years, the ECB has bought more than all the additional bonds from the 19 eurozone governments, exerting a major influence on the region's borrowing costs.
The ECB has also been slower to stop buying more bonds than most western central banks. Some, such as Some, like the US Federal Reserve, have even begun to shrink their balance sheets by not reinvesting the proceeds of maturing bonds.
