How to counteract the inflation that affects the US?
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London/New York (CNN Business) --
The European Central Bank is holding an unscheduled meeting Wednesday to discuss a sharp bond market sell-off that has revived memories of the region's debt crisis more than a decade ago.
The bank would hold the meeting "ad-hoc" to discuss "current market conditions," according to a central bank spokesman.
The ECB left interest rates unchanged at its regular meeting last week, but confirmed plans to raise borrowing costs by 25 basis points next month - its first rate hike in 11 years - and said it could a higher rise in September could occur "if the medium-term inflation outlook persists or deteriorates".
He also said he would stop buying European public debt.
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The US Federal Reserve is also meeting to discuss interest rates, and is expected to raise interest rates by three quarters of a percentage point, something it has not done since 1994.
The ECB's plans to raise rates and end years of supporting the economy through bond purchases have pushed up borrowing costs sharply in some of Europe's most indebted countries, prompting calls for the bank to provide more details on how it proposes to avoid fragmentation of the eurozone bond market.
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The difference between 10-year German and Italian government bond yields stood at their highest level since March 2020 on Monday, according to Tradeweb.
The spread between German and Greek bonds has also widened recently.
Italian 10-year bond yields fell slightly on the news of the ECB's emergency meeting, falling to just under 4% from 4.3% on Tuesday, according to Capital Economics.
"The ECB's carefully communicated strategy was to end asset purchases and then raise rates, starting in small increments and accelerating if necessary," Societe Generale strategist Kit Juckes said.
"This strategy is in all sorts of trouble today as the ECB meets to discuss its anti-fragmentation policy and tools."
At the end of 2021, Greece had the highest debt-to-GDP ratio in Europe, at 193%.
It was followed by Italy, with 151%.
Panic on the periphery
Europe is in better shape than the last time the ECB started raising rates.
The Greek economy, in particular, has outperformed expectations for growth, and has favorable terms on its debt that make repayment less of a concern.
But that is not the case in Italy, which will have to refinance its liabilities sooner, and where growth has been dragging.
"Italy hasn't done enough serious reforms," said Holger Schmieding, chief economist at Berenberg Bank.
And the turmoil in the bond market since last Thursday's ECB meeting has increased pressure on the bank.
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"With the memory of the European debt crisis still fresh, investors are wondering how and under what circumstances ECB President Christine Lagarde would make good on the promise... to act against 'excessive fragmentation' if necessary after the end of net asset purchases," Schmieding wrote in a note on Wednesday titled "Panic in the periphery: time for the ECB to show its cards."
The ECB has said it would step in and resume bond buying if the situation deteriorates rapidly.
However, it is unclear when exactly he would intervene, making investors increasingly nervous.
“The ECB can contain the problem if it wants to,” Andrew Kenningham, chief Europe economist at Capital Economics, said earlier this week.
But they haven't established their "pain threshold," he added.
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