President Mario Draghi says Outright Monetary Transactions in secondary markets will serve as a “fully effective backstop” against mkt volatility.
Mumbai : The European Central Bank (ECB) announced a a new bond-buying programme that allows it to execute potentially unlimited sovereign bond-buying, a widely-expected bid to save the region’s currency.
This would lower fiscally-struggling euro zone countries’ borrowing costs and would act as a “fully effective backstop” against market volatility, ECB President Mario Draghi said on Thursday.
ECB’s move comes after a slew of data pointed towards a recession in the the 17-nation euro zone while raising fears about the viability of the currency union.
“The Governing Council decided on the modalities for undertaking Outright Monetary Transactions (OMT) in secondary markets for sovereign bonds in the euro area,” said Mario Draghi, ECB President at a press conference after the meeting in Frankfurt.
ACT TO SAVE EURO: Draghi said economic growth would continue to remain weak in the Eurozone areas due to ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment.
The OMT programme, which would replace a previous one called SMP, would cover sovereign bonds issued by debt-ridden Eurozone nations with maturities of up to three years.
The ECB has set no limit to the volume of bonds it will purchase under the new programme, he told reporters at the press conference.
” We need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said, repeating that the ECB would stay “firmly within our mandate” of maintaining price stability.
In another decision, the Governing Council of the ECB decided to keep its interest rates unchanged at a record low of 0.75%.
“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged,” Draghi said.
Prior to keeping its rates unchanged, the ECB has cut its main interest rate three times since November. Besides, Draghi said inflation rates are expected to remain above 2 per cent throughout 2012 owing to high energy prices and increases in indirect taxes in some euro area countries.
We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area” Mario Draghi ECB President
Draghi said growth would continue to remain weak in the Eurozone due to ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment.
“A renewed intensification of financial market tensions would have the potential to affect the balance of risks for both growth and inflation,” Draghi added.
The ECB said it expected a very gradual economic recovery and revised down its forecasts for gross domestic product (GDP) for this year to a fall of between 0.6 per cent and 0.2 per cent.
Draghi added, “we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area”
To restore confidence among investors, Draghi said policy-makers need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building.
The ECB said its staff projected an annual GDP growth in a range between (-)0.6 to (-)0.2 % for 2012 and between (-)0.4 % and 1.4 % for 2013. They projected projected inflation in a range between 2.4 to 2.6 % for 2012 and between 1.3 % and 2.5% for 2013.
On the fiscal front, Draghi said it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years.
Draghi also said the ECB will not set a limit on how much sovereign debt it can buy under its new bond-buying programme and will not expect better treatment than other creditors as it has in the past.
“No ex ante quantitative limits are set on the size of outright monetary transactions,” Draghi said.
At the same time, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines”.
Stocks surge
US and European stocks surged on the back of ECB’s aggressive bond-buying program. The Dow Jones was up 236.50 points, or 1.81% at 13,283.98. The S&P 500 Index was up 24.85 points, or 1.77 % at 1,428.29 while the Nasdaq Composite Index was up 63.21 points or 2.06% at 3,132.48. S&P 500 reached its highest since May 2008. Germany’s DAX rallied 2.9% and UK’s FTSE 100 gained 2.1 %. France’s CAC 40 jumped 3.1%.
