Draghi says ECB interest rates could fall further

The European Central Bank will keep interest rates at record lows for an extended period and could yet cut them further, the bank's chief, Mario Draghi, said today.

Less than two hours after the Bank of England gave a steer about future interest rate moves at Mark Carney’s debut policy meeting as governor, the ECB president adopted the same tactic.

“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Mr Draghi told a news conference after the ECB left interest rates at 0.5 per cent, emphasising that this was the first time that the ECB had done so.

He added that the council had discussed cutting rates but decided against and said 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.

Central banks around the world are facing turbulent financial market conditions since the US Federal Reserve last month set out a plan to exit from its money-printing programme.

Whether forward guidance about policy can mitigate the impact of the Fed’s move on other countries remains to be seen.

“50 basis points is not the lower bound,” Mr Draghi said.

His intervention represented a marked departure from the bank's June meeting when he doused expectations of any imminent policy action and also from the ECB's customary insistence that it never precommits on interest rate policy.

The Bank of England, now led by former Canadian central bank chief Mr Carney, said earlier that market pricing for future interest rate rises was “not warranted by the recent developments in the domestic economy”.

Mr 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.”

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 per cent yesterday, a spike that stirred angst in financial markets already jittery after the Fed's gambit.

The tensions there, and in Greece, risk sapping confidence a year after Mr Draghi imposed some calm by vowing to do "whatever it takes" to save the currency.

Mr 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.

He faces a tricky balancing act in talking up the economy and showing the ECB’s readiness to act while being wary of relieving pressure on euro zone governments to put their own houses in order.

"The challenging balancing act is that he has to talk up the economy, he has to send a clear message to markets that the OMT (bond-buying) plan could still be used, giving financial markets confidence," said ING economist Carsten Brzeski. "At the same time, he has to keep up pressure on governments to continue their reforms. He cannot promise too much, he cannot be too confident because otherwise he would again lower the pressure on governments."

Aside from calling time on its quantitative easing programme, the Fed has promised to keep its main interest rate near zero at least until the unemployment rate falls to 6.5 per cent and as long as inflation stays below 2.5 per cent.

Reuters