FRANKFURT, July 5 — The European Central Bank (ECB) should only use a planned tool to fight elevated borrowing costs in the eurozone in exceptional circumstances, the head of the Bundesbank said yesterday.

The ECB said mid-June it would design an instrument to limit differences in the borrowing costs faced by members of the currency club, which have increased in response to as the eurozone’s central bank moves closer to hiking interest rates later this month.

Controlling the divergence is “right at the core” of the ECB’s mandate of price stability, President Christine Lagarde has said.

But Bundesbank President Joachim Nagel said the move could only be justified in “exceptional circumstances”.

Assessing whether elevated borrowing costs for more indebted members of the eurozone were fundamentally justified or not is “virtually impossible”, he told a financial conference in Frankfurt via videoconference.

“Monetary policy must not be driven by what are often very short-lived developments in the financial markets,” added Nagel, who sits on the ECB Governing Council that sets interest rates.

The German central bank has been one of the more conservative concerning monetary policy and has opposed measures that could be seen as underwriting the borrowing of eurozone governments.

It would be “fatal” if eurozone members assumed the ECB would always step in to “assure favourable financing terms”, said Nagel.

Without a “clearly defined instrument” to be only used under certain circumstance “one can easily find oneself in dire straits”, he warned.

The new tool would be necessary when the spread between different government bonds was “fundamentally unjustified”, the ECB’s monetary policy transmission was impaired and the divergence was undermining the bank’s aim to bring inflation to two per cent, he said.

Whatever tool the ECB does come up with, it will have to be approved by members of the Frankfurt-based institution’s governing council, including Nagel.

It is “critical” that borrowing costs moved “broadly in sync” when the ECB adjusted its monetary policy, ECB vice-president Luis de Guindos also said yesterday.

Keeping the divergence under control did “not interfere” with, but rather supported the ECB’s moves, said de Guindos, who also sits on the governing council. — AFP