September 6, 2012

ECB Holds Rates as Draghi Reveals Plan

Unlimited bond buying is key provision

ECB headquarters in Frankfurt. (Photo: AP) ECB headquarters in Frankfurt. (Photo: AP)

The European Central Bank (ECB) held interest rates where they were as ECB President Mario Draghi presented his bond-buying plan designed to save the euro.

Bloomberg reported Thursday that policymakers at the bank kept rates at their present record low of 0.75%, opting to postpone for now any additional cuts as they waited to see if Draghi’s plan would reassure markets that the joint currency could be saved. A Bloomberg survey prior to the announcement had found that 28 of 58 economists believed rates would remain steady.

Draghi revealed his bond-buying plan in a press conference held after the rate announcement, announcing that policymakers agreed to unlimited bond purchases as a means of driving down interest rates in the eurozone. The central bank must be able to make sure its rates extend throughout every country in the bloc, he said in the report, adding, “We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability.”

Prior to the announcements, Jens Kramer, an economist at Nord/LB in Hanover, Germany, said in the report, "The ECB is keeping its powder dry for now and will probably cut rates next month. All eyes are on the bond plan today. Cutting rates won’t really have an impact, but it would be an additional signal that the ECB will throw its full arsenal at saving the euro.”

Draghi is thought to be staking everything he’s got on the plan, which, according to unnamed sources prior to the plan’s release, was supposed to contain provisions for unlimited purchases of sovereign debt with maturities up to three years.

Julian Callow, chief European economist at Barclays in London, said in the report, “Draghi has put his credibility squarely on the line. He has made it his business to save the euro, so he is going to be called on that.”

Under the plan, countries must apply to the region’s rescue fund for help and agree to specific conditions. Other parts of the plan were as previously revealed: fully sterilized purchases to have a neutral effect on the money supply, and the right of the ECB to halt its purchase program if countries do not keep their part of the agreement.

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