European Central Bank approves unlimited bond purchases, UK stocks rise in response
U.K. stocks surged the most in month after European Central Bank President Mario Draghi said policymakers agreed to an unlimited bond-purchase program to help regain control of interest rates in the euro area.
photo/Luis Javier Modino Martinez
Seeking to back up his July pledge to do whatever it takes to preserve the euro, Draghi said the new plan, aimed at the secondary market, would address bond market distortions and “unfounded” fears of investors about the survival of the euro.
The scheme, which the Bundesbank is known to have opposed, would focus on bonds maturing within three years and was strictly within the ECB’s mandate, Draghi said. Only one member of the ECB Governing Council had dissented, he said.
“Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios,” Draghi told a news conference after the central bank’s monthly meeting.
“No ex-ante quantitative limits are set on the size of outright monetary transactions,” he said, using the formal term for ECB bond-buying programmes.
The central bank hopes that by removing private investors’ concern about being paid back last in the event of a sovereign default, they will not head for the exits if the ECB intervenes and buys bonds.
“There is a problem if central banks insist on the preferred creditor status, because the more the public sector intervenes in the bond market, the less interest private investors will have,” a central bank source told Reuters on Wednesday.
“The markets clearly liked what Mario Draghi had to say as he has effectively placed the central bank in the position of being the lender of last resort,” said Angus Campbell, head of market analysis at Capital Spreads in London. “The big question is will it be enough to draw a line under the crisis.”
