Draghi’s Time Horizon for Rates Seen to Exceed a Year: EconomyJana Randow and Joshua Robinson
For Mario Draghi, “an extended period of time” lasts longer than a year, according to economists surveyed after the European Central Bank president used the phrase in a pledge to keep interest rates low.
More than three-quarters of respondents in the Bloomberg monthly survey of 50 economists said that Draghi’s definition is more than 12 months, while 10 said it could be anywhere between six months and a year. The Frankfurt-based central bank will keep its benchmark interest rate unchanged until at least 2015, the median forecast of 34 economists shows.
Draghi’s unprecedented guidance last week that benchmark borrowing costs will stay at their present level or lower for a while has since sparked speculation on how long a timeframe he committed to. The euro dropped a cent on July 9 after Executive Board member Joerg Asmussen said he meant more than 12 months. The ECB clarified the the remark within hours and Executive Board member Benoit Coeure told Bloomberg Television today that officials will reassess its guidance every month.
“Short-term forward guidance doesn’t make sense because it won’t have an impact on the market,” said Kristian Toedtmann, an economist at Dekabank in Frankfurt. “The criteria Draghi cited reflect a commitment for a longer period of time.”
The ECB’s guidance “is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics,” Draghi said on July 4. “It is not six months, it is not 12 months -- it is an extended period of time.”
Asmussen didn’t intend to provide a comment on “the exact length of this period,” the ECB said in an e-mailed statement after Germany’s representative on the central bank’s board told Reuters Insider TV that the guidance goes beyond 12 months.
“It will be reassessed Governing Council after Governing Council,” Coeure said in an interview with Bloomberg Television in Paris today. “Forward guidance is not a shift in our strategy.”
The ECB said today in its monthly bulletin the commitment covers a “flexible horizon which does not pre-specify an end-date” and is “consistent but not directly linked” to the pledge to provide banks with unlimited liquidity through the first half of 2014.
Draghi’s outlook on borrowing costs followed Federal Reserve Chairman Ben S. Bernanke’s signal that the U.S. is preparing to start tapering its $85 billion-a-month bond-buying program later this year. That announcement had sent bond-yields spiraling in Europe’s debt-strapped periphery, threatening the economic recovery the ECB predicts for the end of the year.
The euro slid against the dollar, while bonds and stocks rose after Draghi’s statement, which coincided with a rate outlook by the Bank of England after Mark Carney’s inaugural meeting as governor.
The “message, it seems, was understood by the market,” ECB Governing Council member Erkki Liikanen said on July 5.
The euro-area economy is struggling to emerge from the longest recession since the introduction of the single currency in 1999. Economists in the Bloomberg News survey predict the euro-area economy stagnated in the second quarter.
Gross domestic product will rise 0.1 percent in the three months through September and 0.2 percent in the subsequent two quarters, according to the median result in the survey. At the same time, unemployment is forecast to rise to a record 12.4 percent later this year.
In pledging to keep rates low, the ECB departed from a tradition of never “pre-committing” to any future monetary policy. While the ECB’s version of forward guidance differs from that of other central banks, which have tied interest-rate moves to particular economic indicators or a timeframe, it signifies a “huge, radical change” in European central banking, said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris.
“It’s not just a near-term communication trick, and Draghi once again proved that he isn’t helpless,” Ducrozet said. “But it’s a bit of a risky move because he could be pushed by markets for more clarity, clarity they might be unable or unwilling to provide.”
The majority of economists surveyed doesn’t expect the ECB to develop its commitment at all, while 10 of the 50 participants predict policy makers could evolve last week’s pledge with specific targets. Five forecast the addition of a time period.
The ECB statement was “quite vague” and “this likely hasn’t been without reason,” said Duncan De Vries, an economist at NIBC Bank NV in The Hague. “Policy makers will probably prefer to keep the interest-rate pledge as vague as possible.”
Forward guidance doesn’t mean that interest rates can’t be raised in the future if inflation picks up, ECB Governing Council member Jens Weidmann said in a speech in Munich today.
The pledge doesn’t present a “shift in strategy,” he said. “It’s an attempt to explain our monetary stance in an easier, more comprehensible way so that it is understood by preferably all market participants.”
Eventually, the ECB will have to deliver on its “vague promises,” former board member Lorenzo Bini Smaghi wrote in a guest commentary today for German newspaper Handelsblatt. He predicted that “concrete steps” will be needed in the next months, which may include another rate cut, a negative deposit rate or new longer-term refinancing operations.
For Carsten Brzeski, senior economist at ING Groep NV in Brussels, “a lot will depend on the Fed.”
“If Fed tapering starts toward the end of the year and U.S. yields continue to increase, the euro-zone periphery will suffer from increasing peripheral bond yields,” he said. In that case, “the ECB might be forced to increase its forward guidance by more specific targets.”
Draghi will repeat the phrase in his decision statements for at least six months, according to 38 of 43 economists in the survey. Of those, 15 respondents predict the commitment will remain part of his monthly remarks for more than a year.