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Monday 22 September 2014

ECB says rates to stay at record low for extended period

Published 04/07/2013 | 14:20

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THE European Central Bank will keep interest rates at record lows for an extended period and could yet cut them further, the bank's chief, Mario Draghi, said on Thursday.

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Less than two hours hour after the Bank of England gave a steer about future interest rate moves at Mark Carney's debut policy meeting as governor, the ECB president adopted the same tactic.

"The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time," Draghi told a news conference after the ECB left interest rates at 0.5pc, emphasising that this was the first time that the ECB had done so.

He added that the council had discussed cutting rates but decided against and said the bank could also consider cutting the deposit rate on bank deposits at the ECB - already at zero - in an attempt to foster more lending.

Central banks around the world are facing turbulent financial market conditions since the U.S. Federal Reserve last month set out a plan to exit from its money-printing programme.

Whether forward guidance about policy can mitigate the impact of the Fed's move on other countries remains to be seen.

The ECB left its main refinancing rate at 0.5 percent and the deposit rate at zero, as was expected by economists in a Reuters poll.

"50 basis points is not the lower bound," Draghi said.

His intervention represented a marked departure from the bank's June meeting when he doused expectations of any imminent policy action and also from the ECB's customary insistence that it never precommits on interest rate policy.

German Bund futures hit a day's high and the euro fell in response, hitting a five-week low of $1.2907 from around $1.2985 before Draghi began speaking. It was down 0.7pc on the day.

The Bank of England, now led by former Canadian central bank chief Carney, said earlier on Thursday that market pricing for future interest rate rises was "not warranted by the recent developments in the domestic economy".

Draghi said it was a coincidence that the two central banks had gone down a similar path, adding: "We (the ECB) discussed several forms of forward guidance ... The Governing Council was unanimous on this formulation."

FEW OPTIONS

The move also highlights the paucity of policy options open to the ECB at a time of renewed turmoil in the euro zone.

The ECB met against a backdrop of political crisis in Portugal that pushed its benchmark bond yields above 8pc on Wednesday, a spike that stirred angst in financial markets already jittery after the Fed's gambit.

The tensions there, and in Greece, risk sapping confidence a year after Draghi imposed some calm by vowing to do "whatever it takes" to save the currency.

Instability in Italy's ruling coalition and Greece's scramble to convince its lenders to dole out another tranche of aid have added to the sense of turmoil.

But with the ECB's bond-buying programme requiring a country to seek outside help from the euro rescue fund first and be issuing debt regularly on the bond market, none of the euro zone members in trouble qualify for that help, begging the question what can the ECB do.

Draghi said in March that countries hoping to qualify for ECB bond buys through the programme, dubbed Outright Monetary Transactions (OMT), should first have full market access and be able to issue bonds in different maturities - rules which exclude Portugal from the plan for the foreseeable future.

An acceleration in euro zone inflation in June and stronger-than-expected consumer spending in France and Germany reinforce the ECB's projection for a slow euro zone recovery late this year, leaving it little grounds to justify a rate cut now.

Draghi stuck with the bank's forecast that the euro zone economy would improve in the second half of the year but said the risks to that were skewed to the downside.

He faces a tricky balancing act in talking up the economy and showing the ECB's readiness to act while being wary of relieving pressure on euro zone governments to put their own houses in order.

"The challenging balancing act is that he has to talk up the economy, he has to send a clear message to markets that the OMT (bond-buying) plan could still be used, giving financial markets confidence," said ING economist Carsten Brzeski.

"At the same time, he has to keep up pressure on governments to continue their reforms. He cannot promise too much, he cannot be too confident because otherwise he would again lower the pressure on governments."

Aside from calling time on its quantitative easing programme, the Fed has promised to keep its main interest rate near zero at least until the unemployment rate falls to 6.5pc and as long as inflation stays below 2.5pc.

 

Reuters

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