ECB’s Nagel: Confident TPI Would Stand up to Any Legal Challenge

22 July 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Friday said that the ECB’s new anti-fragmentation tool, the Transmission Protection Instrument (TPI), would stand up to any legal challenge.

‘In designing the TPI, the Governing Council of the ECB placed particular emphasis on taking account of legal requirements and constraints’, said Nagel, who heads the German Bundesbank, in an interview with German business daily Handelsblatt. ‘I am therefore confident that it would be upheld by the courts in the event of any legal proceedings.’

The TPI was not about helping out governments, he said, but instead about ensuring that ECB monetary policy was effectively transmitted. In a potential case for deployment, the ECB will be able to justify the decision analytically, he said, and has shown that it can make tough decisions.

Asked why the OMT was not already enough, Nagel said that the TPI was ‘designed to address other fundamentally unwarranted, disorderly market dynamics’ and ‘primarily geared towards the normalisation of monetary policy.’

‘Fulfilling our mandate of price stability is what’s at stake here’, he said. ‘We want to prevent potential market disruptions from jeopardising the effectiveness of our monetary policy.’

The exceptional situations in which the TPI can be called on are ‘those situations in which market developments are not consistent with the fundamentals’, he said. ‘This can be gauged, for example, from current developments in spreads, or market liquidity compared with previous situations or other countries.’

Nagel said he was ‘very pleased’ with the 50bp rate hike decided by the Governing Council, but that policy normalisation ‘must continue.’ The path taken will be data-driven, he said.

He did not directly answer the question of whether a gas embargo and severe recession would halt or reverse the normalisation process.

‘Of course there are downside risks to growth’, he said. ‘But we are still expecting positive growth rates this year and next. And we see upside risks to inflation. The surging prices are hurting not only consumers, but also the economy as a whole. It was important not to wait any longer, but to take action now.’