ECB’s Crisis Plan Fails to Convince Bond Traders

The European Central Bank has finally pulled the trigger, raising interest rates for the first time in 11 long years and by a larger-than-expected 50 basis points to zero. The era of negative rates is over and the governing council is likely to fully take the euro zone into positive rates at its next quarterly economic review on Sept. 8. Furthermore, it unveiled an unlimited safety net for peripheral European countries' bond yields. But it wasn't enough to convince the market to reduce the spreads on Italian debt, which have soared in recent days.

It is evident that the half-point rate increase persuaded hawks on the governing council to agree to the new Transmission Protection Instrument, which will allow the central bank to buy unlimited amounts of the bonds of countries when it sees a need to to “counter unwarranted disorderly market dynamics.” The ECB statement makes that link quite clearly, as did ECB President Christine Lagarde in the press conference. But details remain sketchy, and Lagarde counterbalanced her tough talk with the perhaps-too-honest view that the ECB doesn't want ever to use the new program. Many feel that hawks on the governing council will prevent it ever being brought into action.