July 7 (Bloomberg) -- Former European Central Bank President Jean-Claude Trichet said his successor Mario Draghi’s pledge to keep interest rates low contains implicit flexibility to move if circumstances change.
“You cannot exclude to move because you might have to move,” Trichet said in an interview in Aix-en-Provence, France. “In any case, it’s always conditional because nobody can think for one second that you would hesitate to move rates in any direction if there is a case to do that. Implicitly forward guidance remains conditional in the eyes of market participants.”
Breaking with Trichet’s practice of avoiding guidance on future rates, Draghi said July 4 that the ECB expects to keep interest rates low for an “extended period” as he tries to restrain market borrowing costs.
With ECB officials leaving their main refinancing rate at 0.5 percent, Draghi fleshed out their outlook for monetary policy after investors pushed up long-term bond yields, threatening the region’s economic recovery. The statement came on the same day that the Bank of England also tried to manage investor expectations in Mark Carney’s first week as governor.
“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi said July 4 in Frankfurt. “What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future.”
Trichet said Draghi’s indication that the bank may cut rates further was probably the most important announcement. “It’s in a way more important that they didn’t exclude to go lower than 50 basis points,” he said during the interview at the annual meeting of France’s Cercle des Economistes.
Trichet said he had faith in the governing council’s decision, adding that circumstances have changed since he led the euro area lender because the Bank of England and the Bank of Canada have joined the U.S. Federal Reserve in giving a medium-term policy outlook.
“In comparison with my own time, they face a sort of contagion of forward guidance,” Trichet said. “This is not necessarily the best concept, but there is in a way an interaction between all central banks. Even if the concept is not the best one, it’s probably difficult to be isolated in a constellation of central banks that are all embarking on forward guidance.”
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