Draghi Signals Worst Is Over as ECB Reiterates Low Rates
European Central Bank President Mario Draghi said economic indicators signal the euro region is past the worst of its longest-ever recession, while reiterating that interest rates will stay low for the foreseeable future.
“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at 0.5 percent. “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
Draghi said that even as the economy improves, money-market prices signaling that rates will rise are “unwarranted.” The ECB head is trying to assure investors that the central bank won’t tighten policy too soon, as it did in 2011. While euro-area manufacturing expanded for the first time in two years in July and business confidence improved for a third month, lending to companies and households fell the most on record in June.
The euro traded at $1.323 at 5:09 p.m. in Frankfurt, close to its level at the start of the press conference and down 0.5 percent from yesterday. The yield on the 10-year German government bond held at 1.67 percent. Spain’s 10-year bond yield fell to 4.63 percent.
Earlier, the Bank of England’s nine-member Monetary Policy Committee held its target for quantitative easing at 375 billion pounds ($570 billion) and the benchmark interest rate at 0.5 percent. Yesterday, the U.S. Federal Reserve pledged to keep buying $85 billion in bonds every month and didn’t give any indication of the timing for trimming debt purchases.
The ECB last month took the unprecedented step of giving investors forward guidance on its rate policy, joining the Fed and other central banks in trying to provide a clearer picture of its thinking.
While Draghi said today that policy makers didn’t discuss defining the guidance in terms of fixed time horizons or economic targets, he went a step further than last month and warned money markets against betting on rate increases any time soon.
“Current expectations of rate hikes in money markets are, according to our assessment, unwarranted,” he said. “Developments have to be significantly better than our current baseline scenario for our outlook for price stability in order for us to change guidance.”
Money-market rates have increased in the past month, with investors expecting overnight interbank borrowing costs to be at 0.23 percent by the ECB’s July 2014 policy meeting, according to the forward rate on Effective Overnight Index Average swaps. That’s up from 0.15 percent on July 5, the day after Draghi’s pledge to keep rates low, and compares with 0.19 percent before he started speaking today. The measure rose as high as 0.42 percent on June 24.
Draghi said the ECB isn’t sure that financial markets have understood the commitment to keep the cost of borrowing low for an extended period. That doesn’t necessarily mean policy makers will repeat the message at each press conference.
“If we repeat every month, you could infer that it’s not forward guidance for an extended period but only for a month, and that’s not what the Governing Council wants,” he said.
In the absence of a regular reiteration of the guidance, investors would be able to infer when the commitment to low rates will come to an end by looking at indicators including inflation expectations, according to Draghi.
“You have all the parameters in your hands to judge the length of time, especially about when the language of guidance might be changed,” he said.
Draghi also said that ECB officials are considering the earlier publication of the minutes from its monthly meetings and that the Executive Board will present a proposal to the Governing Council in the fall. Minutes are currently scheduled to be published 30 years after each rate decision.
Executive Board members Benoit Coeure and Joerg Asmussen voiced support for earlier publication on July 29. Draghi backed the idea in comments in Germany’s Sueddeutsche Zeitung yesterday. Governing Council member Jens Weidmann, the Bundesbank president, said he would welcome a timely release of transcripts to make the ECB’s decisions more comprehensible, Handelsblatt reported today.
Governing Council member Ewald Nowotny, the head of Austria’s central bank, said last year he is wary of publication soon after the meetings as it may prompt governors to act more in their own national interest. He stands by that view, the bank said today.
“Discussion on minutes is at an early stage,” Draghi said. “It’s especially important that any communication we introduce should not put at risk the independence of the members of the Governing Council.”
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