Thursday, 1 August 2013

Draghi Signals Worst Is Over as ECB Reiterates Low Rates

By John Fraher - Aug 1, 2013 6:29 AM PT
European Central Bank President Mario Draghi said recent economic indicators signal that the euro region is through the worst and reiterated that officials plan to keep interest rates low for the foreseeable future.
“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at 0.5 percent. Policy makers expect to keep borrowing costs “at the present or lower level for an extended period of time,” he said, repeating a formula first deployed last month.
ECB President Mario Draghi Mario Draghi, president of the European Central Bank (ECB), last month cited “weaker and weaker” credit flows as one reason for keeping interest rates low. Photographer: Ralph Orlowski/Bloomberg
July 4 (Bloomberg) -- European Central Bank President Mario Draghi talks about the decision to leave the benchmark interest rate at 0.50 percent, forward guidance and the euro-zone economy. Draghi, speaking in Frankfurt at his monthly news conference, also discusses inflation expectations. (Excerpts. Source: Europe by Satellite)
Aug. 1 (Bloomberg) -- European Central Bank President Mario Draghi speaks at a news conference in Frankfurt about the decision to keep its benchmark interest rate at a record low of 0.5 percent for a third month. (This is Draghi's statement only. Source: European Central Bank)
Draghi is trying to assure financial markets that the ECB will keep borrowing costs low enough to foster a recovery from the euro region’s longest-ever recession and won’t tighten policy too soon, as it did in 2011. While euro-area manufacturingexpanded for the first time in two years in July and business confidence improved for a third month, lending to companies and households fell the most on record in June.
The euro traded at $1.3237 as of 3:20 p.m. Frankfurt time, close to its level at the start of the press conference and down 0.5 percent from yesterday. The yield on the 10-year German government bond fell 3 basis points to 1.639 percent.

Forward Guidance

Earlier, the Bank of England’s nine-member Monetary Policy Committee held its target for quantitative easing at 375 billion pounds ($570 billion) and the benchmark interest rate at 0.5 percent. Yesterday, the U.S. Federal Reserve pledged to keep buying $85 billion in bonds every month and didn’t give any indication of the timing for trimming debt purchases.
The ECB last month took the unprecedented step of giving investors forward guidance on its rate expectations, joining the Fed and other central banks in trying to provide a clearer picture of its thinking.
While Draghi said today that policy makers didn’t discuss defining the guidance in terms of fixed time horizons or economic targets, he went a step further than last month and warned money markets against betting on rate increases any time soon.
“Current expectations of rate hikes in money markets are, according to our assessment, unwarranted,” Draghi said.

Money Markets

Money-market rates have increased in the past month, with investors expecting overnight borrowing costs to stand at 0.22 percent by the ECB’s July 2014 policy meeting, according to the forward rate on Effective Overnight Index Average swaps. That’s up from 0.15 percent on July 5, the day after Draghi’s pledge to keep rates low. The measure rose as high as 0.42 percent on June 24.
Draghi also said that ECB officials are considering the earlier publication of minutes from its monthly meetings, though any such step shouldn’t threaten the independence of individual council members. Minutes are currently published 30 years after each rate decision.
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To contact the editor responsible for this story: Craig Stirling at