ECB, abandoning tradition, commits to record low rates

Saturday, 6 July 2013 00:10 - - {{hitsCtrl.values.hits}}

Reuters: The European Central Bank broke with precedent by declaring it would keep interest rates at record lows for an extended period and may yet cut further, responding to turbulence caused by the US Federal Reserve’s exit plan from money-printing. Less than two hours after the Bank of England gave a steer about future interest rate moves, ECB President Mario Draghi followed suit, abandoning the euro zone central bank’s customary insistence that it never pre-commits on policy.

Draghi said the decision to issue ‘forward guidance’ was driven by market volatility, which took hold after the Fed last month set out a plan to begin slowing its stimulus. “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 0.5%, calling it a “very significant step”. “50 basis points is not the lower bound,” he said. Draghi did not say exactly how long ECB rates would stay at record lows. “It’s not six months, it’s not 12 months. It’s an extended period of time.” The council had discussed cutting rates but decided against, he said, and 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. Whether forward guidance about policy can mitigate the impact of the Fed’s move on other countries remains to be seen. “President Draghi’s guidance will protect the front end of the euro curve, say out to 2-3 year maturities, against rising rates in the US,” said Andrew Bosomworth, Senior Portfolio Manager at Pimco, the world’s largest bond fund. “But for maturities beyond the ‘extended period of time’ horizon, they will move in sync with Fed-induced swings in global rates.” German Bund futures hit a day’s high in response to the ECB’s gambit and the euro fell, hitting a five-week low, down 0.7% on the day. Earlier, at former Canadian Central Bank Chief Mark Carney’s debut policy meeting as governor, the Bank of England said 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.”