Transmission Protection Instrument

Transmission Protection Instrument

Subject : Economy

Section : External Sector

The European Central Bank has lifted its record-low minus 0.5% deposit rate to zero, first rate hike in 11 years. It has further ended its eight-year experiment with negative interest rates, by increasing the main refinancing rate to 0.50%.

As ECB rates rise, borrowing costs increase disproportionately for countries like Italy, Spain or Portugal as investors demand a bigger premium to hold their debt. To tackle this The ECB has approved a new bond purchase scheme called Transmission Protection Instrument.

Concept:

Transmission Protection Instrument:

• Approved by the Governing Council of the ECB
• Beneficiary- Eurozone ( out of 19 more indebted nations)
  • The eurozone (EZ) is a monetary union of 19 member states of the European Union (EU).
  • They have adopted the euro (€) as their primary currency and sole legal tender.
• It will ensure that the monetary policy stance is transmitted smoothly across all euro area countries.
• It is a bond purchase scheme intended to cap the rise in Eurozone’s borrowing costs and limit their financial fragmentation.
• Under it Euro system will make secondary market purchases of securities issued in jurisdictions experiencing deterioration in financing conditions not warranted by country-specific fundamentals, to counter risks to the transmission mechanism to the extent necessary.
  • The monetary authority of the euro zone is the Euro system. 

• The scale of TPI purchases depends on the severity of the risks facing policy transmission and done in both ex-post and ex-ante sense.
• Purchase parameters
  • TPI purchases would be focused on public sector securities (marketable debt securities issued by central and regional governments as well as agencies, as defined by the ECB) with a remaining maturity of between one and ten years. Purchases of private sector securities could be considered, if appropriate.
• Criteria 
  • compliance with the EU fiscal framework
  • absence of severe macroeconomic imbalances
  • fiscal sustainability
  • sound and sustainable macroeconomic policies

Purchases would be terminated either upon a durable improvement in transmission, or based on an assessment that persistent tensions are due to country fundamentals.