Friday, 9 December 2011

ECB announces more liquidity-enhancing measures but not more bond-buying

The European Central Bank announced new measures to ease the financial crisis on Thursday after its monetary policy meeting but did not include the one that many most wanted. Bloomberg reports:

European Central Bank President Mario Draghi cut interest rates and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis.

Policy makers meeting in Frankfurt today reduced the benchmark rate by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi said at a press conference.

For full resolution of the debt crisis, Draghi threw the ball back into governments' courts.

“All euro-area governments urgently need to do their utmost” to deliver fiscal sustainability, Draghi said. He denied his Dec. 1 remark that “other elements” could follow a push toward fiscal union was a signal the ECB could step up its bond-market intervention, saying he was “kind of surprised” it had been interpreted that way.

The disappointment with the ECB's reluctance to buy bonds was evident in markets on Thursday. Stocks fell, with the S&P 500 falling 2.1 percent and the Stoxx Europe 600 declining 1.5 percent. The euro fell against the US dollar while Italian and Spanish 10-year bond yields rose.

The Bank of England's monetary policy meeting on Thursday was uneventful, with the BoE keeping its interest rate and quantitative easing programme unchanged.

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