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

ASEAN Ministers to Push for S. China Sea Agreements

According to documents obtained by VOA Khmer, ministers will stand up for 'freedom of navigation, unimpeded lawful maritime commerce, trade and over flight' More

Puerto Rico Defaults on $58M Debt Payment

Payment was due Saturday, default is first in country's 117 years as a United States possession More

Turkish Public Fears Jihadists More Than Kurds

Turkey facing twin threats of terrorism by Islamic State and PKK Kurdish separatists, says President Erdogan’s ruling AK Party More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Iraqi Yazidis Fear Death of Their Communityi
X
Sharon Behn
August 03, 2015 2:23 PM
A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Iraqi Yazidis Fear Death of Their Community

A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Bangkok Warned It Soon Could Be Submerged

Italy's Venice and America's New Orleans are not the only cities gradually submerging. The nearly ten million residents of the Bangkok urban area now must confront warnings the city could become uninhabitable in a few decades. VOA Correspondent Steve Herman reports from the Thai capital.
Video

Video Inclusive Gym Gets People With Disabilities in Fitness Spirit

Individuals with special needs are 58 percent more likely to be obese than the general population. According to the U.S. Centers for Disease Control, they also have an increased likelihood of anxiety, depression and social isolation. But a sports club outside Washington wants to make a difference in these people's lives. With Carol Pearson narrating, VOA's June Soh reports.
Video

Video Astronauts Train Underwater for Deep Space Missions

Manned deep space missions are still a long way off, but space agencies are already testing procedures, equipment and human stamina for operations in extreme environment conditions. Small groups of astronauts take turns in spending days in an underwater lab, off Florida’s southern coast, simulating future missions to some remote world. VOA’s George Putic reports.
Video

Video Special Olympics Show Competitors' Skill, Determination

Special Olympics competitions will wrap up Saturday in Los Angeles, and the closing ceremony for athletes with intellectual disabilities will be held Sunday night. In a week of competition, athletes have shown what they can do through skill and determination. VOA's Mike O'Sullivan reports.
Video

Video Civil Rights Leaders Struggled to Achieve Voting Rights Act

Fifty years ago, lawmakers approved, and U.S. President Lyndon Johnson signed, the Voting Rights Act of 1965. The measure outlawed racial discrimination in voting, giving millions of blacks in many parts of the southern United States federal enforcement of the right to vote. Correspondent Chris Simkins introduces us to some civil rights leaders who were on the front lines in the struggle for voting rights.
Video

Video Shooter’s Grill: Serving Food with a Touch of the Second Amendment

Shooter's Grill, a restaurant in Rifle, Colorado, attracts visitors from all over the world as well as local patrons. The reason? Waitresses openly carry loaded firearms as they serve food, and customers are welcome to carry them, too. VOA's Enming Liu and Lin Yang paid a visit to Shooter's Grill, and heard different opinions about this unique establishment.
Video

Video Despite Controversy, Business Owner Continues Sale of Confederate Flags

At Cooter’s, a store in rural Sperryville, Virginia, about 120 kilometers west of Washington, D.C., Confederate flags are flying off the shelves. The red, white and blue battle flag, with 13 white stars representing the Confederate states, was carried by southern forces during the U.S. Civil War in the 1860s. The South had seceded from the Union over several key issues of disagreement, including slavery. VOA’s Deborah Block has the story.
Video

Video Booming London Property a ‘Haven for Dirty Money’

Billions of dollars of so-called ‘dirty money’ from the proceeds of crime - especially from Russia - are being laundered through the London property market, according to anti-corruption activists. As Henry Ridgwell reports from the British capital, the government has pledged to crack down on the practice.
Video

Video Hometown of Boy Scouts of America Founder Reacts to Gay Leader Decision

Ottawa, Illinois, is the hometown of W.D. Boyce, who founded the Boy Scouts of America in 1910. In Ottawa, where Scouting remains an important part of the legacy of the community, the end of the organization's ban on openly gay adult leaders was seen as inevitable. VOA's Kane Farabaugh reports.

VOA Blogs

World Currencies

EUR
USD
0.9118
JPY
USD
124.31
GBP
USD
0.6420
CAD
USD
1.3048
INR
USD
64.136

Rates may not be current.