Rates will remain low for extended period: ECB president

Frankfurt: European Central Bank (ECB) policy will keep interest rates at current or lower levels for an extended period of time, ECB president Mario Draghi said on Thursday, giving financial markets the clearest guidance to date about future rates.

add_main_image“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.

ECB left interest rates unchanged on Thursday and will try to reassure investors rattled by new turmoil in Europe and the US Federal Reserve’s plans to begin winding up its stimulus.NextMAds

ECB met against a backdrop of political crisis in Portugal that pushed its benchmark bond yields above 8% on Wednesday, a spike that stirred angst in financial markets already jittery after the Fed last month set out a plan to exit from its money-printing programme.

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

Despite the tensions, ECB left its main refinancing rate on hold at 0.5% and the deposit rate at zero, as was expected by economists in a Reuters poll.

“This was widely expected,” Unicredit economist Marco Valli said. “The focus will now be on Draghi’s words, there is very much a focus on the rhetoric.”

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.

Instability in Italy’s ruling coalition and Greece’s scramble to convince its lenders to dole out another tranche of aid add to the sense of turmoil ahead of the ECB meeting.sixthMAds

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.

Balancing act

Last week, Draghi said ECB policy would remain accommodative and that the bank stood ready to act again if needed. But he added that it has done “as much as it can to stabilise markets and support the economy”, pressing governments to reform.

“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.”

Investors will listen carefully for any clues as to whether the ECB is more open to deploying its policy options than a month ago, when Draghi said they were on the shelf.

One of the tools the ECB is looking at is forward guidance—to reduce volatility by guiding markets where interest rates will be in future, especially once rates have reached their lowest limit.

The Fed does it and the Bank of England may soon start.

In his strongest form of guidance so far, Draghi said last week an exit from the ECB’s ultra-loose policy stance was “still distant since inflation is low and unemployment high”.

The Fed has promised to keep its main interest rate near zero at least until the unemployment rate falls to 6.5% and as long as inflation stays below 2.5%. It has now also laid out an exit plan from its money creation.

Over the weekend, policymaker Benoit Coeure said the ECB was looking carefully at the Fed’s experience of giving future guidance, adding that it was too early to say if the ECB was going to take a bigger step in that direction.

Berenberg economist Christian Schulz thought the chances of a move towards Fed-style forward guidance were slim: “That would be a dramatic shift that I don’t think is likely. The best case would be for the ECB to unanimously signal that there is no question of any kind of tightening,” he said. REUTERS