Reuters: ECB breaks tradition, sets guidance

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#1
Date
July 5, 2013 - 6:14AM
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"It's not six months, it's not 12 months. It's an extended period of time" ... Mario Draghi, president of the ECB. Photo: Bloomberg
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 eurozone central bank's customary insistence that it never precommits 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 per cent, calling it a "very significant step".

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"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 per cent 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."

Limited 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 8 per cent on Wednesday, a spike that stirred angst in financial markets already jittery after the Fed's intervention.

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 the ECB rules governing bond-buying intervention were unchanged, signalling Portugal would get no help to resolve a crisis that has seen its bond yields rocket this week.

Concluding its review of the Italian economy, the International Monetary Fund urged more dramatic action from the ECB to help the euro zone, in the form of direct assets purchases and more long term cheap loans "of considerable tenor" to banks.

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.

"We have actually pencilled in a rate cut in September by the ECB and that ties in with the possibility that the Fed could start tapering (its stimulus) around September," said Howard Archer, economist at IHS Global Insight. "I suspect they may well have to put their money where their mouth is."

Reuters
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#2
cheap money all the way, omg
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#3
with all austerity measures done, Europe has room for loose monetary policy and Europe needs loose monetary policy to spur growth.
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#4
http://www.cnbc.com/id/100869591

CNBC: ECB's Draghi Defends Interest Rate Guidance

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Published: Monday, 8 Jul 2013 | 9:34 AM ET
By: Antonia Matthews | Digital News Editor

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Sean Gallup | Getty Images
European Central Bank (ECB) President Mario Draghi reiterated on Monday his commitment to low interest rates, saying higher rates were not currently warranted.

Speaking in front of the European Parliament's Economic and Monetary Affairs Committee, Draghi said: "The situation, as far as price stability is concerned, and the economic situation in large parts of the world is concerned, higher interest rates would not be warranted at this point in time."

He referred to the guidance given at last week's press conference - when he said interest rates would remain at present or lower levels for an extended period - and added: "Of course, higher interest rates would reduce risk on the one hand. On the other hand, higher interest rates in a weak economic situation would destabilize a country making the life of your counter-parties even more difficult."

Draghi also said the process of repairing the financial system in Europe was making progress, but warned that the region's continuing recession still posed a risk to stability.

(Read More: Euro Slides as Draghi Commits to Low Rates)

Speaking in his capacity as chief of the European Systemic Risk Board (ESRB), which was set up to strengthen supervision and rebuild trust in the financial system in the wake of the crisis, Draghi said of the repair process: "Considering all the difficulties, this is actually proceeding."

He referred to Portugal as "just one of the examples where the economic situation remains stressed and social distress is indeed very high."

Political instability in the country rocked financial markets last week. The yield on Portuguese 10-year government bonds climbed above 8 percent on Wednesday, before falling back to below 7 percent, and stocks fell sharply after the resignation of Finance Minister Vitor Gaspar. He introduced harsh austerity measures required in return for bailout funds which were deeply unpopular.

"What the ECB has done is basically say, 'Look, don't unravel the progress that these countries and Portugal especially has made on fiscal consolidation. But make this fiscal consolidation growth friendly. Lower your taxes, lower your current expenditures, make structural reforms,'" Draghi said.

"We know that fiscal consolidation was, and still is, unavoidable."
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#5
CNBC: ECB's Draghi confirms forward guidance
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Published: Thursday, 1 Aug 2013 | 3:56 AM ET

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Photographer | Collection | Getty Images
Mario Draghi, president of the European Central Bank
European Central Bank (ECB) President Mario Draghi on Thursday repeated that interest rates would remain at present or lower levels for an extended period of time, a move the bank hopes will support a recovery in the euro zone later this year and in 2014.

"The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time," Draghi told a press conference after the bank left its main interest rate on hold, as expected, at a record low of 0.5 percent.

Draghi's forward guidance, first issued last month, surprised financial markets, and was in stark contrast to the ECB's tradition of never pre-committing on future rate decisions.

(Read more: ECB's Draghi wants meeting minutes published)
Euro zone manufacturing activity grew for the first time in July, data released earlier on Thursday showed, offering some hope the region is slowly recovering. Unemployment remains stubbornly high at 12.1 percent, however.

"As long as the economy stays weak, they can credibly say: 'We are on hold for an extended period of time'," Riccardo Barbieri, chief European economist at Mizuho International, told CNBC.

(Read more: Brighter euro zone data offers scope for ECB rate cut)
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