ECB commits to record low rates

July 4, 2013

Running out of options to boost the flagging eurozone economy, the European Central Bank has taken a leaf out of the Federal Reserve’s play book and promised it is not going to put up the cost of borrowing anytime soon and indeed could cut interest rates further.

ECB head Mario Draghi said: “The Governing Council took the unprecedented step to give forward guidance in a rather more specific way than it ever did in the past. It says the key ECB interest rates to remain at present or lower levels for an extended period of time. It’s the first time the Governing Gouncil says so.”

Draghi said the decision to issue ‘forward guidance’ was driven by market volatility, which took hold after the Federal Reserve last month set out a plan to begin slowing its stimulus.

But he would not be more specific on 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 ECB met as political crisis in Portugal pushed the interest rates it is having to offer on its bonds to unsustainable levels.

Draghi said ECB rules meant it could not intervene to help, but he had encouraging words for Lisbon: “I think Portugal has achieved very remarkable results. It has certainly been a painful route and the results that have been achieved have been quite significant, remarkable, if not outstanding.”

The tensions in Portugal, and in Greece, risk sapping confidence one

year after Draghi imposed some calm by vowing to do “whatever it takes” to save the euro.

Meanwhile in London, the Bank of England’s new governor Mark Carney chaired his first policy meeting.

There were no new moves to boost the UK economy. The main interest rate stays at 0.5 percent and stimulus through asset purchases – quantitative easing – will continue unchanged.

But Carney and the other policymakers did signal they could start giving more detailed guidance as soon as next month on when interest rates could change.

And they told the financial markets that the UK’s economy is not yet doing well enough to justify a recent rise in the amount of interest investors are expecting in return for buying British government bonds.