The European Central Bank has finally got the all clear to come to rescue of euro zone countries in financial crisis with an unlimited bond buying program.
ECB president Mario Draghi promises the proposal will lower borrowing costs for countries like Spain and Italy while reassuring investors about the financial security of the euro zone.
Only one member of the ECB governing council had objected to the move – believed to be the German Bundesbank.
“Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios,” said Draghi.
“No ex-ante quantitative limits are set on the size of outright monetary transactions.”
Senior creditor status waived
As an extra commitment to investors, Draghi also waived the ECB’s senior creditor status on purchased bonds – meaning private creditors would have equal calls on cash in case of default.
“In our view, the ECB has taken another step in the right direction, but is still some way away from totally removing the tail risks that investors fear,” said Schroders’ European Economist, Azad Zangana. “ While the ECB has found the big gun in bond buying, it is missing the ammunition to make a long lasting positive impact on markets.
“Although the bon program will have no explicit limit to the amount of purchases, there is a serious flaw in its design. The ECB’s insistence to sterilise the bond purchases means that the ECB can only buy bonds as long as demand for Euro T-bills remains.
“If demand dries up, then the bond purchases would be halted. In that sense, Draghi may be overreaching when he said that the ECB would “backstop” the monetary union.”
Bank rate stay at record low
Earlier, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.
The Bank of England’s Monetary Policy Committee also met and voted to maintain the official bank rate at 0.5%.and to continue with asset purchases totalling £375 billion.
The rate has stayed the same record low level since March 2009.
Ray Boulger of mortgage adviser John Charcol said; “It is still too early to assess how big an impact the Funding For Lending (FFL) Scheme will have but what can be said for certain is that, despite Santander’s 0.5% standard variable rate increase, mortgage rates for new fixed rate borrowers have fallen further over the last month.”
