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.
TEXT SIZE - +
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

Thailand's Political Power Struggle Continues

Court gave Prime Minister Yingluck Shinawatra until May 2 to prepare her defense over abuse of power charges but uncertainty remains over election timing More

Malaysia Plane Search Tests Limits of Ocean Mapping Technology

Expert tells VOA existing equipment’s maximum operating depth is around 6 kilometers as operation continues on ocean bed for any trace of MH370 More

Open Source Seeds Hit the Market, Raise Awareness

First open source seeds include 29 new varieties of broccoli, celery, kale, quinoa and other vegetables and grains More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Pet Kangaroo Helps Spread Environmental Messagei
X
Penelope Poulou
April 22, 2014 5:53 PM
Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pet Kangaroo Helps Spread Environmental Message

Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pro-Russian Separatists Plan 'Federalization Referendum' in Eastern Ukraine

Pro-Russian separatists in eastern Ukraine say they plan to move forward next month with a referendum vote for greater autonomy, despite the Geneva agreement reached with Russia, the U.S. and Ukraine to end the political conflict. VOA's Brian Padden reports from the city of Donetsk in Eastern Ukraine.
Video

Video Pope Francis Hopes Dual Canonizations Will Reconcile Church

On April 27, two popes - John the XXIII and John Paul II - will be made saints in a ceremony at St. Peter’s Square. VOA religion correspondent Jerome Socolovsky says the dual canonization is part of the current pope’s program to reconcile liberals and conservatives in the Roman Catholic Church.
Video

Video In Capturing Nature's Majesty, Film Makes Case for Its Survival

French filmmaker Luc Jacquet won worldwide acclaim for his 2005 Academy Award-winning documentary "March of the Penguins". Now Jacquet is back with a new film that takes movie-goers deep into the heart of a tropical rainforest - not only to celebrate its grandeur, but to make the case for its survival. VOA's Rosanne Skirble reports.
Video

Video Boston Marathon Bittersweet for Many Runners

Monday's running of the Boston Marathon was bittersweet for many of the 36,000 participants as they finished the run that was interrupted by a double bombing last year. Many gathered along the route paid respect to the four people killed as a result of two bombings near the finish line. VOA's Carolyn Presutti returned to Boston this year to follow two runners, forever changed because of the crimes.
Video

Video International Students Learn Film Production in World's Movie Capital

Hollywood - which is part of Los Angeles - is the movie capital of the world, and many aspiring filmmakers go there in hopes of breaking into the movie business. Mike O'Sullivan reports that regional universities are also a magnet for students who hope to become producers or directors.
Video

Video Pacific Rim Trade Deal Proves Elusive

With the U.S.-led war in Iraq ended and American military involvement in Afghanistan winding down, President Barack Obama has sought to pivot the country's foreign policy focus towards Asia. One aspect of that pivot is the negotiation of a free-trade agreement among 12 Pacific Rim nations. But as Obama leaves this week on a trip to four Asian countries he has found it very difficult to complete the trade pact. VOA's Ken Bredemeier has more from Washington.
Video

Video Autistic Adults Face Housing, Job Challenges

Many parents of children with disabilities fear for the future of their adult child. It can be difficult to find services to help adults with disabilities - physical, mental or emotional - find work or live on their own. The mother of an autistic boy set up a foundation to advocate for the estimated 1.2 million American adults with autism, a developmental disorder that causes communication difficulties and often social difficulties. VOA's Faiza Elmasry reports.
AppleAndroid

World Currencies

EUR
USD
0.7217
JPY
USD
102.17
GBP
USD
0.5949
CAD
USD
1.1009
INR
USD
60.326

Rates may not be current.