(Adds ECB chief economist)
PARIS/FRANKFURT, March 13 (Reuters) - European Central Bank policymakers shifted to damage control on Friday after a slip by ECB chief Christine Lagarde on Thursday sent Italian bond yields soaring.
The ECB provided fresh stimulus on Thursday for the coronavirus-hit euro zone, but Lagarde spooked markets when she said it was not the ECB's job to close spreads. Investors took that as a sign of complacency about rising debt costs in one of the euro zone's weakest members.
"We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions of the euro area," ECB chief economist Philip Lane said on Friday.
"We clearly stand ready to do more and adjust all of our instruments, if needed to ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission," Lane said in a blog post, an new communication tool for the ECB.
Italy's 10-year government bond yield soared 55 basis points on Thursday, its biggest one-day jump since late 2011 -- the height of the euro zone debt crisis. The 10-year bond yield spread over Germany surged almost 67 bps, its biggest one-day widening on record.
French central bank chief Francois Villeroy de Galhau joined Lane in correcting the message, arguing that the ECB is willing to deviate from its self-imposed rule that bond purchases should be done in sync with each country's shareholding in the bank, or according to the capital key.
"If there are fragmentation risks we will use all of the possible flexibility, which means for purchases of public debt that we can temporarily distance ourselves from countries' capital keys and buy more of some debt and less of others," Villeroy told France's Radio Classique.
Unlike the U.S. Federal Reserve and the Bank of England, the ECB held back on cutting rates. Sources close to the discussion said a cut was not proposed on Thursday, even though markets had fully priced in a move.
"The Governing Council retains the option of future cuts in the policy rate, if warranted by a tightening in financial conditions or a threat to our medium-term inflation aim," Lane said.
Lagarde was criticized by both economists and politicians for her comments about spreads, as Italy is so far facing the biggest disruption in Europe from the coronavirus.
Villeroy also said that the ECB was not blind to the volatility in financial markets but insisted that it was guided by its economic analysis.
"Our package is coherent as regards the economic analysis and is a powerful help for companies," Villeroy said. (Additional reporting by Sudip Kar-Gupta and Dhara Ranasinghe Editing by Himani Sarkar & Simon Cameron-Moore)