The Transmission Protection Instrument (TPI) is a new monetary policy tool announced by the European Central Bank (ECB) in July 2022. Its key features are:
The TPI aims to counter "unwarranted, disorderly market dynamics" that pose a serious threat to the transmission of the ECB's monetary policy across the euro area. It seeks to ensure the ECB's monetary policy stance is transmitted smoothly to all euro area countries by addressing excessive risk premia on sovereign bonds that are not justified by a country's fundamentals.
Under the TPI, the Eurosystem (the ECB and national central banks) can make secondary market purchases of public sector securities (government bonds) with a remaining maturity of 1-10 years. The purchases are focused on jurisdictions experiencing an unwarranted, disorderly tightening of financing conditions. The scale of purchases is not restricted ex ante and depends on the severity of risks to monetary policy transmission.
The ECB has set out cumulative criteria to assess whether a jurisdiction is eligible for TPI purchases, including:
These criteria serve as an input for the ECB's decision-making but do not constitute strict eligibility rules.
The TPI is an addition to the ECB's toolkit alongside the Pandemic Emergency Purchase Programme (PEPP) reinvestment flexibility, which remains the first line of defense against fragmentation risks. The Outright Monetary Transactions (OMT) program also remains part of the ECB's toolkit.In essence, the TPI is designed to safeguard the transmission of the ECB's monetary policy by allowing targeted purchases of sovereign bonds facing unwarranted market pressures, subject to certain policy criteria.
Sources:
The Transmission Protection Instrument (takes you to the ECB's website)
The ECB’s Transmission Protection Instrument a legal and economic analysis
