ECB sees no need for now to unleash new bond-buying scheme in Italy, sources say

FRANKFURT (Reuters) - European Central Bank policymakers did not discuss bond market turmoil in Italy at Thursday's meeting and do not expect to use their newly unveiled bond-buying scheme imminently as conditions do not warrant it, sources told Reuters.

The new Transmission Protection Instrument (TPI) will let the ECB buy bonds from indebted countries such as Italy to cap any excessive rise in their borrowing costs, helping limit financial fragmentation within the euro zone.

Italian bonds have sold off since Prime Minister Mario Draghi first announced his resignation last week, setting the country on course for an early election that a bloc led by the far-right Brothers of Italy looks likely to win.

But sources close to the ECB's Governing Council said policymakers did not discuss the Italian situation at Thursday's meeting, at which they raised interest rates for the first time in 11 years as well as unveiling the TPI.

The sources said policymakers did not currently expect to use the TPI to hoover up Italian bonds and would tackle any disorderly rise in the premium that Italy pays over Germany using proceeds from the ECB's Pandemic Emergency Purchase Programme (PEPP).

They said ECB staff had developed a model that, based on a wide array of indicators, would reveal if financing conditions in one country had been tightening in a way not justified by economic fundamentals.

This model was not showing such unwarranted fragmentation in any country at present, the sources added.

The sources said all euro zone countries were currently eligible for TPI, based on the conditions outlined by the bank on Thursday.

An ECB spokesperson declined to comment.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)