Public debt and interest rates: the compass dilemma
In recent weeks, sovereign bond yields across Europe have come under upward pressure. If this is a harbinger of things to come, how should the ECB respond? There is a maximalist view that sees this development as a reason to halt the loosening of monetary policy. At the other end of the spectrum lies the minimalist position, which regards the event as irrelevant. But a third option also exists: realism. According to this view, sovereign yields become relevant only when they interfere with the transmission mechanism of monetary policy. This approach aligns with the ECB’s institutional stance, which has been formalized through the creation of extraordinary monetary instruments in recent years. So far unused, but ready to be deployed.
