On July 21, the European Central Bank (ECB) launched the Transmission Protection Instrument (TPI), a tool designed to impart the ECB’s monetary policy “smoothly” across euro area economies. If required, the TPI will achieve this through unlimited sovereign bond purchases to minimise spreads between eurozone government bond yields. Yet the mechanism has attracted fierce criticism from monetary policy hawks, who claim the ECB has opened the door to direct monetary financing.
Changing economic conditions across the eurozone have contributed to the TPI’s development. As inflation has accelerated, the ECB has been forced to dial back its emergency monetary policy response to the Covid-19 pandemic by raising interest rates and winding down ongoing asset-purchase programmes. This, in turn, has caused government bond yields to spike as investors factor in higher inflation and tighter monetary policy conditions.
