ECB Hints at Further Bond Buying but Holds off Action

The European Central Bank (ECB) has disappointed markets, with its president, Mario Draghi, promising further measures to support the euro “over the coming weeks”, rather than any immediate action as was originally envisaged.

“The euro is irreversible,” he said, adding that the high yields on some eurozone government bonds were unacceptable and the ECB could intervene in the bond markets to support struggling nations such as Spain and Italy.

“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective,” he added.

“The Governing Council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks we will design the appropriate modalities for such policy measures.”

Draghi added that governments seeking assistance would first have to apply to the eurozone’s rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), and accept “strict and effective” conditionality. “First of all governments need to go to the EFSF; the ECB cannot replace governments.”

A week ago hopes were raised of more immediate and decisive intervention, when Draghi pledged that the ECB would do “whatever it takes” to support the euro.

Stephanie Kretz, strategist at private banker Lombard Odier, commented: “Monetary policy alone cannot solve the underlying structural debt issues underpinning this crisis. Draghi created unrealistic expectations among investors but failed to announce concrete measures significant enough to reassure investors, given the restraining scope of the ECB’s mandate.

“One unintended consequence might be that next time the ECB wants to calm markets, his words won’t carry the same effect.” 

Earlier in the day, the ECB announced that the main eurozone interest rate would remain unchanged at a record low of 0.75%. The Bank of England (BoE) similarly made no change to UK base rate, which remains at 0.50%.

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