7th APRIL 2015 - Vol.XXXVIII No.018
Business News

ECB vows low interest rates

FRANKFURT: The European Central Bank (ECB) broke with precedent by declaring it would keep interest rates at record lows for an extended period and may yet cut further, responding to turbulence caused by the US Federal Reserve's exit plan from money-printing.

Less than two hours after the Bank of England gave a steer about future interest rate moves, ECB president Mario Draghi followed suit, abandoning the euro zone central bank's customary insistence that it never precommits on policy.

Draghi said the decision to issue 'forward guidance' was driven by market volatility, which took hold after the Fed last month set out a plan to begin slowing its stimulus.

"The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time," Draghi told a news conference after the ECB left interest rates at 0.5 per cent, calling it a "very significant step".

"Fifty basis points is not the lower bound," he said.

Draghi did not say exactly how long ECB rates would stay at record lows. "It's not six months, it's not 12 months. It's an extended period of time."

The council had discussed cutting rates but decided against, he said, and the bank could also consider cutting the deposit rate on bank deposits at the ECB - already at zero - in an attempt to foster more lending.

Whether forward guidance about policy can mitigate the impact of the Fed's move on other countries remains to be seen.

Earlier, at former Canadian central bank chief Mark Carney's debut policy meeting as governor, the Bank of England said market pricing for future interest rate rises was "not warranted by the recent developments in the domestic economy".

Draghi said it was a coincidence that the two central banks had gone down a similar path, adding: "We (the ECB) discussed several forms of forward guidance ... The Governing Council was unanimous on this formulation."

The move also highlights the paucity of policy options open to the ECB at a time of renewed turmoil in the euro zone.

The ECB met against a backdrop of political crisis in Portugal that pushed its benchmark bond yields above 8pc on Wednesday, a spike that stirred angst in financial markets.

The tensions there, and in Greece, risk sapping confidence a year after Draghi imposed some calm by vowing to do "whatever it takes" to save the currency.

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