July 8, 2013 / 2:13 PM / 4 years ago

Draghi says will have to see if ECB guidance suffices

BRUSSELS (Reuters) - European Central Bank President Mario Draghi reiterated the bank’s vow to keep interest rates at record lows but said it remained to be seen whether the unprecedented move last week would be sufficient.

The ECB’s move to give guidance on its expectations for the course of monetary policy was driven by market volatility, which took hold after the U.S. Federal Reserve last month set out a plan to begin slowing its stimulus.

Abandoning its traditional policy of never pre-committing on future rates, the ECB said last Thursday it would keep its interest rates at present or record lows for an extended period - its first, tentative use of so-called ‘forward guidance’.

“We’ll have to see what the market reaction has been, is and will be to this statement,” Draghi told European lawmakers on Monday when asked if the ECB move would be enough, leaving open whether it could do more if the ploy fails to convince markets.

The ECB made the statement in response to turmoil that saw peripheral euro zone sovereign bond yields rise sharply after Fed Chairman Ben Bernanke said on June 19 the U.S. central bank was likely to begin slowing its bond buying later this year.

Describing last week’s policy statement as sharpening the ECB’s communication, Draghi reiterated the Governing Council’s view that it “expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”

Analysts are unsure how long an “extended period” is and Draghi refused to get drawn into that discussion on Thursday.

The ECB’s steer is more flimsy than the guidance offered by the Federal Reserve or even the Bank of England, which suggested last Thursday it could give more detailed guidance on monetary policy as soon as next month. (ID:nL5N0FA1PR]

Aside from calling time on its quantitative easing program, 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.

European Central Bank (ECB) President Mario Draghi takes part in the European Parliament's Economic and Monetary Affairs Committee in Brussels July 8, 2013. REUTERS/Yves Herman


Peppered with questions on last week’s ECB statement, Draghi said in another reply that rates would remain at present or lower levels “for the foreseeable future.”

He later added: “The exit from our monetary policy stance being accommodative is distant.”

The ECB left its main interest rate at a record low of 0.5 percent last Thursday but Draghi said the 23-man Governing Council discussed a cut.

On Saturday, two senior Council members said the bank’s decision to break with tradition by giving ‘forward guidance’ was in line with its mandate, playing down the degree of shift in policy Draghi announced last Thursday.

The risk is that when the Fed does begin unwinding its stimulus, the ECB’s words won’t be enough to protect the euro zone from the fallout, and market interest rates will rise - a scenario that would make the bloc’s escape from crisis harder.

Then the ECB would have to back up its words with action, and the policy options it has are unpalatable to many at the bank - a conservative institution focused on inflation fighting.

Earlier on Monday, Draghi responded to a question on the view of the Bank for International Settlements (BIS), which said last month the longer central banks persist with accommodative policies, the harder it will be to exit them.

“It is difficult to disagree with the BIS (Bank for International Settlements) assessment of risks of too low interest rates for a long period of time,” Draghi told the parliamentary committee.

But he added, “The situation as far as price stability is concerned and the economic situation in large parts of the world is concerned, higher interest rates would not be warranted at this point in time.”

Additional reporting by Sakari Suoninen, writing by Paul Carrel; Editing by Hugh Lawson

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