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ECB promises low rates, and even a cut to support growth

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(Globalpost/GlobalPost)

The European Central Bank promised on Thursday to keep its interest rates at current record low levels for an "extended period" or even cut them to support the ailing eurozone economy.

Seeking to calm worries about Portugal, where a political crisis sparked by austerity has rocked markets and driven up borrowing rates this week, Draghi assured that the country "is in safe hands".

The ECB's governing council voted to hold its key interest rate at an all-time low of 0.50 percent for the third month in a row.

Draghi vowed that "monetary policy will remain accommodative for as long as necessary," in remarks to a press conference.

The ECB's decision-making governing council "expects the key ECB interest rates to remain at present or lower levels for an extended period of time," Draghi said.

"Our exit (from low interest rates) is very distant."

The comments pushed the euro down against the dollar, but triggered a rally in stock prices all around Europe, since it was the first time that the ECB has ever given such forward guidance.

Draghi's comments came shortly after the Bank of England in London also hinted that it would not lift record-low borrowing costs in the short term.

The decision to issue such "unprecedented forward guidance" was "unanimous", the ECB chief added.

"We had an extensive discussion about a possible interest rate cut," he said.

"But after this extensive debate, we basically unanimously agreed about this forward guidance," Draghi said.

No analysts or ECB watchers had expected the central bank to announce any further policy moves this month after paring back the refinancing rate by a quarter of a percentage point in May.

The central bank also left its other two rates -- the deposit rate and the marginal lending rate -- at zero percent and 1.0 percent respectively.

Financial markets have been spooked by the announcement last month that the US Federal Reserve is preparing to phase out its bond-buying or so-called "quantitative easing" programme, bringing the prolonged period of loose monetary policy to an end.

And he political crisis in Portugal had sparked fears of a new flare-up in the eurozone crisis.

In response, interest rates on sovereigns debt have risen across the euro area and financial conditions have generally tightened, albeit not dramatically.

Draghi insisted that Portugal had made "outstanding" progress in gettings finances and its economy in order and is currently "in safe hands", after the resignation of finance minister Vitor Gaspar.

The results achieved have been "quite significant, remarkable, if not outstanding," Draghi said.

The ECB was "assured by the new minister" Maria Luis Albuquerque, Draghi said.

-- Stronger guidance may be needed: analyst --

The bank's decision to hold rates steady "was wholly expected in the light of the recent modest improvement in some eurozone activity indicators," said Capital Economics economist Jonathan Loynes.

The ECB's mantra in the past has always been that it never "pre-commits" to policy moves.

"But Draghi has been softer on that stance than his predecessor (Jean-Claude) Trichet and has already provided general assurances that any policy 'exit' is a long way off," Loynes said.

"However, that hasn't prevented market rates from rising thus far so rather stronger guidance -- either on the future path of interest rates or on the likely implementation of the OMT bond-buying programme -- may well be needed to prevent market pressures from rising further," he added.

Newedge Strategy analyst Annalisa Piazza also believed that "no additional non-standard measures are expected to be announced today."

Nevertheless "policymakers have increasing concerns about the effects of rising market rates on their past policy accommodation.

"Communication tools are probably going to be the first ECB step in the attempt to put a lid on recent spike in short rates," Piazza said.

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http://www.globalpost.com/dispatch/news/afp/130704/ecb-promises-low-rates-and-even-cut-support-growth