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Asked about Italy, ECB's Lagarde says she won't fix 'policy errors'

FILE PHOTO: Christine Lagarde, European Central Bank (ECB) president addresses a news conference, in Frankfurt

FRANKFURT (Reuters) -The European Central Bank won't use its latest emergency scheme to buy the bonds of countries that make "policy errors", its President Christine Lagarde said on Monday in response to a question about Italy's likely next government.

A right-wing alliance led by Giorgia Meloni triumphed in Italy's general elections on Sunday, inheriting one of the euro zone's heaviest debt burdens at a time of rising borrowing costs and looming recession.

Meloni has pledged not to take risks with Italy's fragile finances and stick to European Union budget rules but coalition partner Matteo Salvini has called for increasing the deficit.

Asked in the European Parliament whether the ECB could deploy its Transmission Protection Instrument to help Italy, Lagarde wouldn't name any country but said the scheme was only there to support fiscally prudent countries while others should apply for a bailout.

TPI was announced in July to stem a widening in borrowing costs between Italy - and other debt-laden countries - and safe-haven Germany, but it has not yet been used.

"It's (used in) a situation where ... there are disorderly market dynamics that are not justified by fundamentals or by economic policy errors that will have been made," Lagarde said.

"Those are more relevant for the OMT," she added in reference to the Outright Monetary Transactions, a separate bond-buying scheme which requires a bailout from the EU.

TPI comes with easier strings attached, such as respecting the EU's fiscal rules and not showing economic imbalances.

Lagarde, who is battling the highest inflation in the euro zone's history, also said countries using their budget to protect citizens from high food and energy costs must be careful not to fuel further price growth.

Some euro zone governments are using fiscal measures to help households but this increases already high budget deficits and, by supporting demand, adds to inflationary pressures.

"It is essential that fiscal support used to shield those households from the impact of higher prices is temporary and targeted," Lagarde told a parliamentary hearing in Brussels. "This limits the risk of fuelling inflationary pressures, thereby also facilitating the task of monetary policy."

Lagarde also repeated the ECB's most recent message that interest rates will need to rise over the next several policy meetings even as growth slows substantially.

(Reporting by Balazs KoranyiEditing by Francesco Canepa and Mark Heinrich)