The European Central Bank left interest rates at a record low 0.5 per cent today and affirmed that they will remain there for some while to come and could yet fall further.
ECB president Mario Draghi hinted that policy would not be tightened until well into next year at the earliest, although the central bank will give no time horizon for when rates might move.
“Our monetary policy stance ... provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014,” Mr Draghi told a news conference.
“The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time,” he said, affirming last month’s first stab at giving forward guidance on rates.
That was unanimously supported by the 23-strong council, he said.
Stronger economic reports in the past few days support the ECB’s expectations of a pick-up later this year, though the policy options are complicated by market responses to the US Federal Reserve’s plans to slow its stimulus programme.
“Euro area economic activity should stabilise and recover at a slow pace. The risks surrounding the economic outlook for the euro area continue to be on the downside,” Mr Draghi said.
“Recent developments in global and financial market conditions and the related uncertainties may have the potential to negatively affect economic conditions.”
The ECB reacted last month to market turmoil sparked by the Fed’s exit plan by breaking with precedent and offering forward guidance on rates.
Individual policymakers’ interpretations of that guidance over the last month have blurred the message, however, with Bundesbank chief Jens Weidmann insisting the ECB had not “tied itself to the mast”, while fellow German policy Joerg Asmussen said the guidance was good for “beyond” 12 months.
The result is that the initiative has proven only partially successful in calming markets and offsetting fallout from the Fed’s stance.
“There is no precise deadline,” Mr Draghi said.
Yesterday, the Fed said it would keep buying $85 billion in mortgage and Treasury securities per month in an effort to strengthen the economy, and gave a more dovish tilt to its post-meeting statement.
The ECB decision to leave rates unchanged was almost universally expected in a Reuters poll.
“At this stage, we’ve seen several indicators improving a little bit,” Rabobank economist Elwin de Groot said, pointing to closely watched business surveys, which showed euro zone manufacturing grew for the first time in two years.
Moreover, unemployment in the 17-country bloc sharing the euro fell for the first time in more than two years in June.
But lending to firms is still declining in the euro zone and is especially weak across the bloc’s troubled debtor countries, which could keep calls for lower policy rates alive.
Mr Draghi wants to begin publishing the minutes of ECB meetings, which until now have been kept secret, and said proposals on providing markets with more information would be brought forward later in the year.
Mr Draghi said he favoured a “richer communication”, explaining why decisions had or had not been taken. But he said it was vital that any change did not put at risk the independence of ECB members.
“We are not a one-country set-up,” he said.
A move to increase transparency could meet resistance from some ECB policymakers, who fear the move could open them up to political pressure from national governments.
The ECB’s forward guidance is more flimsy than the guidance offered by the Fed, which, aside from getting ready to call time on its quantitative easing plan, has promised to keep its main interest rate near zero at least until the unemployment rate falls to 6.5 per cent and as long as inflation stays below 2.5 per cent.
Mr Draghi said there was no discussion of the ECB adopting an economic threshold as a trigger.
Reuters
