Europe

ECB's Draghi decides to keep interest rates at 0.5%

  • 2 August 2012
  • From the section Europe
Media captionMario Draghi: Euro is irreversible

While much of the world has been looking on at the Olympics in London on Thursday afternoon the eyes of many in the financial world were focussed on Frankfurt and the monthly meeting of the European Central Bank.

The key questions on most minds: would the ECB further reduce interest rates from its current 0.75? And, perhaps, more importantly would it signal its intention to buy Spanish and Italian government bonds, the cost of which have been rising to worrying levels in recent weeks?

The ECB President, Mario Draghi, announced interest rates would remain as they are; still higher than the UK's 0.5%.

Not exactly good news for Irish savers, whatever about those with debts.

He said that euro zone economic growth is weak and uncertainty about the outlook is weighing on confidence in the bloc.

He added the euro crisis would not destroy the currency bloc, which brings us to the second question.

With markets worried that Spain and Italy might need a bail-out similar to Ireland's, the cost of their 10-year bonds or government IOUs, have been rising towards the unsustainable 7%.

Last week Mr Draghi appeared to indicate that, despite opposition in countries like Germany and Finland, the ECB would resume buying national bonds in order to lower the costs.

But that's a tricky issue politically because it's not clear that the ECB has a mandate to do so and some argue that in so doing the bank is helping the countries avoid dealing with core underlying problems such as rising deficits.

In other words Spain and Italy might be encouraged into the view that they don't need to raise taxes or cut public spending.

So, a lot of attention was inevitably given to what Mr Draghi had to say about ECB bond buying.

"The governing council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective," he said.

"The governing council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks we will design the appropriate modalities for such policy measures."

Put simply the president of the ECB was saying that the bank may start bond buying but no immediate decision to do so will be taken.

The markets, in their initial reaction, weren't impressed; the Spanish stock exchange fell by 5%.

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