News / Economy

European Central Bank Commits to Record Low Rates

The Euro sculpture at European Central Bank, Frankfurt, Germany, July 2012 file photo.
The Euro sculpture at European Central Bank, Frankfurt, Germany, July 2012 file photo.
Reuters
 
The European Central Bank 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 U.S. 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 percent, 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.
 
"President Draghi's guidance will protect the front end of the euro curve, say out to 2-3 year maturities, against rising rates in the U.S.," said Andrew Bosomworth, senior portfolio manager at Pimco, the world's largest bond fund.
 
"But for maturities beyond the 'extended period of time' horizon, they will move in sync with Fed-induced swings in global rates."
 
German Bund futures hit a day's high in response to the ECB's gambit and the euro fell, hitting a five-week low, down 0.7 percent on the day.
 
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."
 
Limited options
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 8 percent on Wednesday, a spike that stirred angst in financial markets already jittery after the Fed's intervention.
 
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 program 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 euro zone members in trouble qualify for that help, begging the question of what can the ECB do.
 
Draghi said the ECB rules governing bond-buying intervention were unchanged, signaling Portugal would get no help to resolve a crisis that has seen its bond yields rocket this week.
 
Concluding its review of the Italian economy, the International Monetary Fund urged more dramatic action from the ECB to help the euro zone, in the form of direct assets purchases and more long term cheap loans "of considerable tenor" to banks.
 
Draghi stuck with the bank's forecast that the euro zone economy would improve in the second half of the year but said the risks to that were skewed to the downside.
 
"We have actually penciled in a rate cut in September by the ECB and that ties in with the possibility that the Fed could start tapering [its stimulus] around September," said Howard Archer, economist at IHS Global Insight. "I suspect they may well have to put their money where their mouth is."

You May Like

Video Drug Use Rises in Afghanistan

Ninety percent of world’s heroin comes from Afghanistan More

Here's Your Chance to Live in a Deserted Shopping Mall

About one-third of the 1200 enclosed malls in the US are dead or dying. Here's what's being done with them. More

Video NASA: Big Antarctica Ice Shelf Is Disintegrating

US space agency’s new study indicates Larsen B shelf could break up in just a few years More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Poverty, Ignorance Force Underage Girls Into Marriagei
X
May 21, 2015 4:14 AM
The recent marriage of a 17-year old Chechen girl to a local police chief who was 30 years older and already had a wife caused an outcry in Russia and beyond. The bride was reportedly forced to marry and her parents were intimidated into giving their consent. The union spotlighted yet again the plight of many underage girls in developing countries. Zlatica Hoke reports poverty, ignorance and fear are behind the practice, especially in Asia and Africa.
Video

Video Poverty, Ignorance Force Underage Girls Into Marriage

The recent marriage of a 17-year old Chechen girl to a local police chief who was 30 years older and already had a wife caused an outcry in Russia and beyond. The bride was reportedly forced to marry and her parents were intimidated into giving their consent. The union spotlighted yet again the plight of many underage girls in developing countries. Zlatica Hoke reports poverty, ignorance and fear are behind the practice, especially in Asia and Africa.
Video

Video South Korea Marks Gwangju Uprising Anniversary

South Korea this week marked the 35th anniversary of a protest that turned deadly. The Gwangju Uprising is credited with starting the country’s democratic revolution after it was violently quelled by South Korea’s former military rulers. But as Jason Strother reports, some observers worry that democracy has recently been eroded.
Video

Video California’s Water System Not Created To Handle Current Drought

The drought in California is moving into its fourth year. While the state's governor is mandating a reduction in urban water use, most of the water used in California is for agriculture. But both city dwellers and farmers are feeling the impact of the drought. Some experts say the state’s water system was not created to handle long periods of drought. Elizabeth Lee reports from Ventura County, an agricultural region just northwest of Los Angeles.
Video

Video How to Clone a Mammoth: The Science of De-Extinction

An international team of scientists has sequenced the complete genome of the woolly mammoth. Led by the Swedish Museum of Natural History in Stockholm, the work opens the door to recreate the huge herbivore, which last roamed the Earth 4,000 years ago. VOA’s Rosanne Skirble considers the science of de-extinction and its place on the planet
Video

Video Blind Boy Defines His Life with Music

Cole Moran was born blind. He also has cognitive delays and other birth defects. He has to learn everything by ear. Nevertheless, the 12-year-old has had an insatiable love for music since he was born. VOA’s June Soh introduces us to the young phenomenal harmonica player.
Video

Video Women to March for Peace Between Koreas

Prominent female activists from around the world plan to march through the demilitarized zone dividing North and South Korea to call for peace between the two neighbors, divided for more than 60 years. The event, taking place May 24, marks the International Women's Day for Peace and Disarmament and has been approved by both Koreas. Zlatica Hoke has more.
Video

Video Drug Use Rises in Afghanistan Following Record High Poppy Crops

Afghanistan has seen record high poppy crops during the last few years - and the result has been an alarming rise in illegal drug use and addiction in the war-torn country. VOA's Ayesha Tanzeem has this report from Kabul.
Video

Video America’s Front Lawn Gets Overhaul

America’s front yard is getting a much-needed overhaul. Almost two kilometers of lawn stretch from the U.S. Capitol to the Washington Monument. But the expanse of grass known as the National Mall has taken a beating over the years. Now workers are in the middle of restoring the lush, green carpet that fronts some of Washington’s best-known sights. VOA’s Steve Baragona took a look.

VOA Blogs

World Currencies

EUR
USD
0.8982
JPY
USD
121.07
GBP
USD
0.6376
CAD
USD
1.2215
INR
USD
63.612

Rates may not be current.