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

Obama: I Will Do 'Everything I Can' to Close Guantanamo

US president says prison continues 'to inspire jihadists and extremists around the world' More

Sierra Leone Educates on Safe Ebola Burials

Also, country is improving at rapid response to isolated outbreaks, but health workers need to be even faster, officials say More

Religion Aside, Christmas Gains Popularity in Communist Vietnam

Increasingly wealthy Vietnamese embrace holiday due to its non-religious glamor, commercial appeal More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
US Decision on Cuba Underscores Divisions Among Miami Cubansi
X
Sharon Behn
December 19, 2014 9:34 PM
For decades, older, more conservative Cubans have been gathering at Café Versailles on the corner of Calle Ocho to eat Cuban food and talk politics. After hearing of President Barack Obama’s decision, a number of them gathered in front of the café with posters to protest. VOA's Sharon Behn reports on the situation.
Video

Video US Decision on Cuba Underscores Divisions Among Miami Cubans

For decades, older, more conservative Cubans have been gathering at Café Versailles on the corner of Calle Ocho to eat Cuban food and talk politics. After hearing of President Barack Obama’s decision, a number of them gathered in front of the café with posters to protest. VOA's Sharon Behn reports on the situation.
Video

Video Three Cities Bid for Future Obama Presidential Library

President Barack Obama still has two years left in his term in office, but the effort to establish his post-presidential library is already underway. The bid for the Obama Presidential Library is down to four locations in three states -- New York, Hawaii, and Illinois. As VOA’s Kane Farabaugh reports, each of them played an important part in the president’s life before he reached the White House.
Video

Video Cuba Deal is Major Victory for Pope’s Diplomatic Initiatives

Pope Francis played a key role in brokering the US-Cuba deal that was made public earlier this week. It is the most stunning success so far in a series of peacemaking efforts by the pontiff. VOA religion reporter Jerome Socolovsky has more.
Video

Video Fears of More Political Gridlock in 2015

2014 proved to be a difficult year politically for President Barack Obama and a very good year for the U.S. Republican Party. Republican gains in the November midterm elections gave them control of the Senate and House of Representatives for the next two years -- setting the stage for more confrontation and gridlock in the final two years of the Obama presidency. VOA National Correspondent Jim Malone has a preview from Washington.
Video

Video Sudan School Becomes Target of Aerial Attacks

The school dropout rate is at an all-time high in Sudan's South Kordofan state because many schools have been destroyed during the three-year civil war between the government and SPLA-N rebel forces. Adam Bailes visited Sudan's Nuba Mountains' region and reports many children are simply too scared to go to school
Video

Video VOA Reporter Tours Devastated Peshawar School

Islamist militants wearing military uniforms and strapped with explosives attacked a military run school Tuesday in the northwestern Pakistani city of Peshawar. At least 141 people were killed in the horrific attack, most of them young students. VOA reporter Ayaz Gul visited the devastated school and attended the funeral of the principal who courageously tried to save her students from the deadly attack.
Video

Video Nigerians Fleeing Boko Haram Languish in Camp Near Capital

In its five-year effort to impose Islamic law in northeastern Nigeria, the Boko Haram extremist group has killed thousands of people and forced hundreds of thousands to flee. Some of those who ran for their lives now live in squalor on the edges of the capital, Abuja. Chris Stein reports for VOA.
Video

Video Aceh Rebuilt Decade After Tsunami, But Scars Remain

On December 26, 2004 there was an earthquake in the Indian Ocean so powerful it caused the Earth’s axis to wobble a few centimeters. Onshore on the island of Sumatra, the resulting tsunami was devastating. A decade later, VOA Correspondent Steve Herman reports from Banda Aceh, Indonesia, where although there is little remaining evidence of the physical devastation, the psychological scars among survivors remain.

All About America

AppleAndroid

World Currencies

EUR
USD
0.8143
JPY
USD
119.23
GBP
USD
0.6390
CAD
USD
1.1596
INR
USD
63.304

Rates may not be current.