ECB Keeps Rates at Record Low Amid Euro-Area Recovery

Photographer: Ralph Orlowski/Bloomberg

With interest-rate expectations near levels that he described last month as “unwarranted,” Draghi’s challenge will be to convince investors of his July pledge to keep rates low even as the economy recovers. Close

With interest-rate expectations near levels that he described last month as... Read More

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Photographer: Ralph Orlowski/Bloomberg

With interest-rate expectations near levels that he described last month as “unwarranted,” Draghi’s challenge will be to convince investors of his July pledge to keep rates low even as the economy recovers.

The European Central Bank kept its benchmark interest rate unchanged at a record low after the 17-nation euro area returned to growth in the second quarter.

Policy makers meeting in Frankfurt today left the main refinancing rate at 0.5 percent for a fourth month after reducing it by a quarter point in May. The decision was predicted by all 56 economists in a Bloomberg News survey. ECB President Mario Draghi will hold a press conference at 2:30 p.m.

With interest-rate expectations near levels that he described last month as “unwarranted,” Draghi’s challenge will be to convince investors of his July pledge to keep rates low even as the economy recovers. Gross domestic product expanded 0.3 percent in the three months through June after six quarterly contractions and recent economic indicators point to the rebound continuing.

“Draghi is going to give it another try to push down rate expectations today,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam. “The ECB is certainly not happy with the market’s reaction over the past months.”

The overnight rate that banks expect to charge each other by the ECB’s August 2014 rate meeting, as measured by Eonia forward contracts, was at 0.29 percent today. That’s near the level in late June that triggered Draghi’s July 4 promise to keep rates low for an extended period. It fell as low as 0.09 percent on July 8.

New Forecasts

The ECB held its deposit rate at zero and its marginal lending rate at 1 percent. The Bank of England kept its bond-purchase target at 375 billion pounds ($585 billion) and maintained its key rate at 0.5 percent today. Sweden’s Riksbank kept its key repo rate unchanged at 1 percent for a fourth consecutive meeting.

The ECB will today present new growth and inflation forecasts for the currency bloc, reflecting the second-quarter growth that exceeded forecasts. An index of the region’s services and factory output last month climbed to the highest level since June 2011 and economic confidence soared to a two-year high.

Economists from Nomura International Plc to Royal Bank of Scotland Group Plc predict that even with the euro area’s recession over, the ECB will make only minor changes to its outlook today.

Inflation Outlook

The central bank predicted in June that the economy will shrink 0.6 percent this year before growing 1.1 percent in 2014. It forecast inflation at 1.4 percent in 2013 and 1.3 percent next year, well below its target of just under 2 percent.

“Despite incoming business-cycle data continuing to surprise to the upside, we do not expect the ECB to be building a case for strong endorsement of the recovery,” said Nick Matthews, senior European economist at Nomura in London. “Draghi will judge the short-term data as evolving in line with expectations and only revise the 2013 growth forecast up slightly.”

“We do not see any revision to the projection for inflation in 2014, which is the key number in terms of the rate discussion and the guidance, and we have left our estimate of the 2013 figure unchanged,” said Richard Barwell, an economist at RBS in London. The economic expansion “should be sufficient to deliver modest upwards revisions to the output for growth in 2013 and 2014,” he said.

Fed Unwinding

The ECB’s introduction of forward guidance followed signs that the U.S. Federal Reserve will start unwinding its $85 billion a month bond-buying program this year. That had sparked a global sell-off in bonds, driving yields higher in stressed economies including Spain (GSPG10YR) and Portugal. (GSPT10YR)

The U.S. economy maintained a “modest to moderate” pace of expansion from early July through late August, the Fed said in its Beige Book report yesterday. The bank will start to slow its bond purchases at its Sept. 17-18 meeting according to 65 percent of economists in a Bloomberg News survey last month. The survey also indicated policy makers will end the program, known as quantitative easing, by June 2014.

Draghi has so far fought rising market rates with words. His pledge to keep rates low has been accompanied by his outlook for subdued inflation extending into the medium term and broad-based weakness in the euro-area economy. The region’s unemployment rate held at a record 12.1 percent in July.

“The ECB is surely leaning toward waiting and observing,” said Stefan Schilbe, an economist at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf. “Draghi will be very careful not to be too optimistic. He won’t stress the topic of a rate cut as much as last month, but it’s too soon to scrap it altogether.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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