As he prepares to launch a bond-buying plan to save the euro, European Central Bank’s President Mario Draghi has announced today that interest rates will not be cut, leaving the benchmark rate at 0.75%.
Draghi’s bond-buying plan involves the ECB buying short-dated bonds on secondary market of countries that seek bailout from Europe’s rescue funds to buy their debt on the primary market, which would require them to agree upon certain conditions.
The ECB President’s explanation for bond purchases is that ECB interest rates are not being applied in most eurozone countries because investors are pricing in the risk of a breakup, something he considers unacceptable. The ECB needs to regain control over interest rates to create price stability.
ECB officials said that ECB will sterilize its purchases to soothe concerns about printing money, and it won’t have seniority on any bonds that it purchases, and no yield-spread targets or bands would be set publicly.
An elaborate explanation is awaited of Draghi as to how banks will carry out a pledge to buy bonds on open markets, which experts believe would be a more effective way of containing borrowing costs in the crippled eurozone.
Apart from interest rates, the ECB’s 23-member council also discussed modalities of Draghi’s asset-purchase plan. The members also considered new economic projections and contemplated on loosening documents submission rules for collateral banks for central bank loans.
The ECB is taking measures to tackle the eurozone debt crisis, which has so far forced five nations into bailouts and has brought 17 eurozone nations to the brink of recession.