ECB to keep rates at record low for an extended period

The European Central Bank will keep interest rates at record lows for an extended period and could yet cut them further, the bank’s chief, Mario Draghi, said on Thursday.

“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, emphasising that this was the first time that the ECB had done so.

He added that the council had discussed cutting rates but decided against and said 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.

Central banks around the world are facing turbulent financial market conditions since the US Federal Reserve last month set out a plan to exit from its money-printing programme.

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

“50 basis points is not the lower bound,” Draghi said.

His intervention represented a marked departure from the bank’s June meeting when he doused expectations of any imminent policy action and also from the ECB’s customary insistence that it never precommits on interest rate policy.

German Bund futures hit a day’s high and the euro fell in response, hitting a five-week low of $1.2907 from around $1.2985 before Draghi began speaking. It was down 0.7 per cent on the day.

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

The ECB met against a backdrop of political crisis in Portugal that pushed its benchmark bond yields above eight per cent on Wednesday, a spike that stirred angst in financial markets already jittery after the Fed’s gambit.

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.

Instability in Italy’s ruling coalition and Greece’s scramble to convince its lenders to dole out another tranche of aid have added to the sense of turmoil.

But with the ECB’s bond-buying programme requiring a country to seek outside help from the euro rescue fund first and be issuing debt regularly on the bond market, none of the eurozone members in trouble qualify for that help, begging the question what can the ECB do.

Draghi said in March that countries hoping to qualify for ECB bond buys through the programme, dubbed Outright Monetary Transactions (OMT), should first have full market access and be able to issue bonds in different maturities - rules which exclude Portugal from the plan for the foreseeable future.