FRANKFURT (Reuters) - The European Central Bank left interest rates at a record low 0.5 percent on Thursday and affirmed that they will remain there for some while to come and could yet fall further.
ECB President Mario Draghi hinted that policy would not be tightened until well into next year at the earliest, although the central bank will give no time horizon for when rates might move.
“Our monetary policy stance ... provides support to a gradual recovery in economic activity in the remaining part of the year and in 2014,” Draghi told a news conference.
“The Governing Council confirms that it expects the key ECB rates to remain at present or lower levels for an extended period of time,” he said, reiterating last month’s first stab at giving forward guidance on rates.
That was unanimously supported by the 23-strong council, he said. Draghi was guarded, however, when pressed on whether the policymakers discussed a rate cut this month.
“We actually discussed only forward guidance, and within that ... confirmation of forward guidance you have an implicit decision about today’s interest rates,” he said. “And the decision about forward guidance was in fact unanimous.”
The apparent absence of a discussion about cutting rates contrasted with last month, when Draghi said the council had an “extensive discussion” about a cut before deciding to hold.
Berenberg bank economist Holger Schmieding said this change and the ECB’s view that an upturn in economic indicators pointed to a pick up later this year, “can be seen as modestly hawkish, in the sense that they may dampen residual rate cut hopes”.
A closely watched business survey showed earlier on Thursday that euro zone manufacturing grew for the first time in two years in July. [ID:nL9N0EG006] Moreover, unemployment in the bloc fell for the first time in more than two years in June.
Despite the promising economic reports, the ECB policy options are complicated by market responses to the U.S. Federal Reserve’s plans to slow its stimulus program.
The ECB reacted last month to market turmoil sparked by the Fed’s exit plan by breaking with precedent and offering forward guidance on rates.
Individual policymakers’ interpretations of that guidance over the last month have blurred the message, however, with Bundesbank chief Jens Weidmann insisting the ECB had not “tied itself to the mast”, while fellow German policy Joerg Asmussen said the guidance was good for “beyond” 12 months.
The result is that the initiative has proven only partially successful in calming markets and offsetting fallout from the Fed’s stance.
“There is no precise deadline,” Draghi said, before adding: “Current expectations of rate hikes in money markets are according to our assessment unwarranted.”
On Wednesday, the Fed said it would keep buying $85 billion in mortgage and Treasury securities per month in an effort to strengthen the economy, and gave a more dovish tilt to its post-meeting statement.
The ECB decision to leave rates unchanged was almost universally expected in a Reuters poll.
Draghi wants to begin publishing the minutes of ECB meetings, which until now have been kept secret, and said proposals on providing markets with more information would be brought forward later in the year.
Draghi said he favored a “richer communication”, explaining why decisions had or had not been taken. But he said it was vital that any change did not put at risk the independence of ECB members.
“We are not a one-country set-up,” he said.
A move to increase transparency could meet resistance from some ECB policymakers, who fear the move could open them up to political pressure from national governments.
The ECB’s forward guidance is more flimsy than the guidance offered by the Fed, which, aside from getting ready to call time on its quantitative easing plan, 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.
Draghi said there was no discussion of the ECB adopting an economic threshold as a trigger.
Writing by Paul Carrel/Mike Peacock. Editing by Jeremy Gaunt