Draghi Says ECB Rates To Stay Low for �Extended Period
Comment of the Day

July 04 2013

Commentary by David Fuller

Draghi Says ECB Rates To Stay Low for �Extended Period

This is a reassuring statement from Mario Draghi, reported by Bloomberg
President Mario Draghi said the European Central Bank expects to keep interest rates low for an “extended period” as he tries to restrain market borrowing costs, a new departure for a central bank averse to setting policy in advance.

With ECB officials today 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 economic growth. 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 at a press conference in Frankfurt . “What the Governing Council did today was to inject a downward bias in interest rates for the foreseeable future. Our exit is very distant.”

Stocks and bonds rose, while the euro fell after Draghi's comments. The remarks followed a surge in Portugal 's 10-year bond yield above 8 percent for the first time since November and after the Federal Reserve signalled it may soon pull back monetary stimulus.

Forward Guidance
By using so-called forward guidance, Draghi's aim is to persuade investors that the ECB has no plans to end its easy policy stance so they in turn will keep longer-term rates low, paving the way for consumers and households to borrow cheaply and bolster economic activity. Historically, Draghi and predecessor Jean-Claude Trichet have said that the ECB “never precommits” to any future monetary policy.

The reason for taking what he called an “unprecedented” step was the ECB's expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the 17-nation euro-area economy, Draghi said.

“The risks surrounding the economic outlook for the euro area continue to be on the downside,” he said, pointing to recent tightening in global financial conditions as one threat.

The Stoxx 600 Index jumped and was 2.1 percent higher at 291.54 points at 3:03 p.m. in Frankfurt . The euro declined, falling as low as $1.2883 from $1.2985 before the press conference. The yield on Portugal 's 10-year bond yield, which yesterday climbed to 8 percent for the first time since November, declined as low as 7.37 percent.

David Fuller's view It is hard to believe that anyone seriously thought that Mario Draghi and the ECB were likely to raise rates anytime soon. Nevertheless, this welcome statement for the markets was a departure from the ECB's cautious policy that it “never precommits”, previously introduced by Mr Draghi's predecessor, Jean-Claude Trichet.

Europe has a long list of economic problems, as everyone knows. However, all those forecasts over a number of years, claiming that the Eurozone could or should break up and might even collapse, missed two critical points as I have long maintained: 1) That the euro would survive, if that is what most European politically leaders actually want; 2) Mario Draghi's ECB has been politically and economically astute, and therefore very effective under extremely difficult and chaotic circumstances.

(See also my reply to: Save Europe: Split the Euro and France Must Lead Breakup of Euro, and other items which can be found by in the Archive, under Mario Draghi)

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