Although Mario Draghi, ECB president, tempered his cautiously optimistic tone by saying that financial market tensions continued to hit eurozone economic activity, markets reacted positively to his comments and the bond auctions.
Mr Draghi’s comments, after the ECB governing council decided unanimously to leave its main interest rate unchanged at the record low of 1 per cent, suggested the euro’s monetary guardian would not rush to cut official borrowing costs further or expand its policy armoury. Mr Draghi appeared to rule out US- or UK-style “quantitative easing” – creating money to buy assets – saying ECB efforts to combat the crisis were focused on encouraging banks to lend to the real economy. He forecast “substantial” demand in a second offer of three-year loans next month, when a broader range of assets would be eligible as collateral.
“People feel a little more confident about the eurozone, and the ECB probably wants to build on that”, said Gilles Moec, European economist at Deutsche Bank. “If it [the strategy] fails they will have to find something else.” Financial markets still expected further cuts in ECB interest rates – possibly as early as March. The ECB’s action to help banks had “certainly prevented what could have been a major funding constraint” and resulted in some unsecured bank bond markets reopening, Mr Draghi said. Although much of the €489 billion provided in December had been parked back at the ECB, it had not been by the same banks that borrowed the money, which was “actually flowing through the economy”.
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