By Tom Fairless
FRANKFURT--The European Central Bank on Wednesday outlined a plan to shield weaker eurozone economies from rising borrowing costs as it increases interest rates, signaling to investors that the bank will stand behind the region's embattled governments.
The move, following days of delay, underscores the complicated task facing the ECB as it tries to follow the Federal Reserve in raising borrowing costs to combat record-high inflation in the currency union.
Unlike the Fed, the ECB needs to worry as it raises rates about how higher borrowing costs will pressure highly indebted southern European economies like Italy and Spain. Bond yields in southern Europe have surged by much more than those in Germany since the ECB last week unveiled plans for a gradual series of rate hikes.
In a statement published after an emergency meeting of top ECB officials, the bank signaled it would buy more bonds of weaker eurozone governments under an existing bond-purchase program. The officials also tasked ECB staff with accelerating the design of a new "anti-fragmentation instrument" that would narrow differences in borrowing costs across the region.
While analysts cheered the ECB's move, it could raise fresh concerns in the region's largest economy, Germany, where officials have long worried about overreach by the ECB.
"That's what markets needed to hear, finally!," said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management in Geneva. "Details will matter a lot, but now I can't see how they could not deliver by the next meeting."
Borrowing costs for Southern European countries have jumped in recent days, reflecting concerns that the region's governments might struggle to meet their obligations as spending demands increase. That has revived memories of the eurozone debt crisis nearly a decade ago.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
06-15-22 0902ET
