ECB surprises with forward guidance on rates

Mario Draghi

European Central Bank president Mario Draghi has said the bank will keep interest rates at their historic low for “extended period” and suggested further cuts could on the horizon.

At today’s monetary policy meeting, the ECB voted to keep interest rates at 0.5 per cent and stated that it “expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.

Draghi told a press conference: “Monetary policy will remain accommodative for as long as necessary.”

This is the first time that the ECB has issued what looks like forward guidance on the expected path of interest rates. Draghi added that the intention of the guidance is to make clear that there is a downward bias to monetary policy and said the current 0.5 per cent is not the lowest rates could go to.

The euro fell sharply after the news to 0.8 per cent against the dollar, while equity markets reacted positively. At 1540 BST, the Euro Stoxx 50 was up 2.84 per cent to 2,643.68 while the FTSE 100 gained 3.07 per cent to 6,421.09.

IHS Global Insight chief UK and European economist Howard Archer says: “While the ECB made no changes to interest rates at its July meeting, a very significant development saw the ECB for the first time formally give some clear forward guidance on interest rates.

“This forward guidance is in stark contrast to the ECB’s repeated past mantra that it never pre-commits on monetary policy, and the move is aimed as a clear antidote to the recent marked rise in eurozone market interest rates following the US Federal Reserve indicating that it could start tapering its bond purchases later this year.”