#ECB #fight #rate #spreads #core #mandate #explanations #Insolence
European Central Bank President Christine Lagarde said on Monday that tackling spreads between sovereign borrowing rates is “at the core of the institute’s mandate,” appeasing critics who would see the ECB as slipping out of its role. . . The ECB defines its monetary policy for nineteen countries in the euro zone and “the fight against fragmentation” is “a precondition for the proper transmission” of this policy, she declared during a hearing before the European Parliament. »
Let’s resume calmly and without panic, you will be able to show off your dinners in the city in less than 5 minutes with your wise explanations about the rate differentials!
A “spread” is an English term (as almost always when you want to appear professional and modern) generally used in finance to designate a spread, that is, a difference between two indices or two rates.
To make it even simpler “spread” = difference.
But admit that it is more pedantic to say spread, while it is very “attic” to say “gap.”
So, since we’re among the attic folks, let’s keep it simple.
Therefore, the ECB considers that one of its prerogatives, one of its responsibilities (this is the mandate we are talking about) is the fact of guaranteeing that the differentials in borrowing rates between the different countries of the euro zone do not become too important.
If Germany borrows at 1 and Italy borrows at 5, the margin, the difference, is 5-1 = 4. (You’ll see, you’ve also mastered the high-flying math of big finance.)
This fight against fragmentation “is at the very heart of the mandate” of the ECB, the French hammered. The monetary institution had to react urgently last week to show its determination to counter any rate drop in the euro zone and any panic over Italian debt.
“No one should doubt our determination and our commitment,” says Christine Lagarde. Because if it does not react, the ECB “is not doing the job that the treaty entrusts us with, which is to guarantee price stability” defined by inflation at 2%, she argued. The ECB announced last week that it was going to develop a new “anti-fragmentation instrument” to control the famous “spreads”.
Well, these interest rate differential stories have nothing to do with price stability and everything to do with government borrowing, but the ECB has to justify its actions, but this is almost “mouth of foutage” because to avoid interest rate differentials, the ECB will have to buy the debt of the threatened countries in order to lower rates precisely. And the ECB, by buying public debt, will increase the money supply and therefore inflation!
The more the ECB avoids fragmentation, the more it will be forced to print money and the more inflation will rise.
There you have it, you know almost everything about “spreads”!
Carlos Sannat
“This is a ‘presslib’ article, that is, free to reproduce in whole or in part as long as this paragraph is reproduced below. Insolentiae.com is the site where Charles Sannat expresses himself daily, offering cheeky and uncompromising analysis of economic news. Thanks for visiting my site. You can sign up for the daily newsletter for free at www.insolentiae.com. »
AFP source via BFM here