ECB leaves rates unchanged at ¾%, launches new bond purchase program

Peter Hensman, Global Strategist di Newton, BNY Mellon Group

The key aim of the ECB is to repair the “financial fragmentation” of the euro area, as countries and companies face very different interest costs across the Eurozone. The consensus was evenly split between those calling for a rate cut and those expecting no change in rates. On this front, the ECB did not deliver. However, it was the detail of the measures beyond standard monetary policy that held market attention. Against expectations that the ECB might launch outright quantitative easing or set a ceiling on government bond yields, the ECB indicated it would conduct

“Outright Monetary Transactions” (OMT) in order to ensure that the whole Eurozone benefits from a single monetary policy. The OMT purchases replace the Securities Market Program (SMP), and addresses a number of the criticisms aimed at the SMP. Importantly, the amount of and period for which bonds can be acquired under the OMT will be unlimited, and the bonds bought by the ECB will not be treated as senior to other bond holders. Peripheral bond markets and equities more broadly reacted positively to the announcement. However, the key stumbling block to this ECB support remains the need for politicians to sign up to the conditionality required by the central bank, especially the requirement to request IMF involvement. Whether this is political barrier can be overcome in the months ahead is likely to be crucial.