* ECB and Bank of England embark on forward guidance
* Draghi says rates low for extended period, could fall
* BoE says market pricing for rate rises not warranted
* ECB holds refi rate at 0.5 pct, discussed cut
By Paul Carrel and Sakari Suoninen
FRANKFURT, July 4 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
Less than two hours hour 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
"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, 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 U.S. 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.
The ECB left its main refinancing rate at 0.5 percent and
the deposit rate at zero, as was expected by economists in a
"50 basis points is not the lower bound," 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.
German Bund futures hit a day's high and the euro fell in
response, hitting a five-week low of $1.2907 from around $1.2985
before Draghi began speaking. It was down 0.7 percent on the
The Bank of England, now led by former Canadian central bank
chief Carney, said earlier on Thursday that 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."
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 gambit.
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 programme 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
what can the ECB do.
Draghi said in March that countries hoping to qualify for
ECB bond buys through the programme, dubbed Outright Monetary
Transactions (OMT), should first have full market access and be
able to issue bonds in different maturities - rules which
exclude Portugal from the plan for the foreseeable future.
An acceleration in euro zone inflation in June and
stronger-than-expected consumer spending in France and Germany
reinforce the ECB's projection for a slow euro zone recovery
late this year, leaving it little grounds to justify a rate cut
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
percent and as long as inflation stays below 2.5 percent.