ECB will deploy new tool if needed to avoid fragmentation -Lagarde
AMSTERDAM, June 9 (Reuters) - The European Central Bank will adjust its existing instruments or deploy new ones if needed to avoid fragmentation in euro zone government bond markets as it begins to tighten monetary policy, ECB President Christine Lagarde said on Thursday.
Borrowing costs have rapidly diverged in recent weeks between safe-haven Germany and highly indebted Southern European states like Italy as markets have priced in an unwinding of the ECB's long-running stimulus.
"If it is necessary, as we have amply demonstrated in the past, we will deploy either existing adjusted instruments or new instruments that will be made available," Lagarde told a news conference following the central bank's policy meeting.
"But we are committed - committed - to proper transmission of our monetary policy and as a result fragmentation will be avoided to the extent that it would impair that transmission."
The central bank for the 19 countries that use the euro had earlier announced it would end its Asset Purchase Programme on July 1 before raising interest rates later next month.
The APP, introduced in 2014 to avert potential deflation, has been a key factor that has held down borrowing costs in the bloc's highly indebted states and the announcement caused yield differences between government bonds to widen. nF9N2UZ02K
The ECB has pledged to fight "unwarranted" fragmentation between member states as this hampers the transmission of its monetary policy and said its policy will include "flexibility" under stressed conditions. But the bank has yet to define "unwarranted" and has not said what action it would take to tackle it.
Thursday's decision reiterated the ECB's commitment to choosing where it reinvests proceeds from maturing bonds held under its Pandemic Emergency Purchase Programme (PEPP) in the event of stress.
(Reporting by Yoruk Bahceli; Editing by Catherine Evans)