European Central Bank President Mario Draghi said on Thursday that euro area interest rates are likely to remain low for an 'extended period' of time, a statement that was construed as a forward guidance about the policy path to markets that were rattled by the Portugal political crisis and the U.S. Federal Reserve's tapering announcement.
"The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time," Draghi said in his introductory statement at the regular press conference in Frankfurt, which was held after the bank announced its decision to leave the refi rate unchanged at record low 0.50 percent for a second straight month.
"This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics," Draghi said.
With the forward guidance announcement, the ECB has taken a historical step by moving away from its earlier stance of not pre-committing on interest rates.
"What the governing council did today was to inject a downward bias in interest rates for the foreseeable future," Draghi said.
Speaking to reporters, Draghi noted that giving a forward guidance was an unprecedented step and was the first time for the Governing Council. He also said the rate-setting body was unanimous in the formulation of the guidance. However, he did not clarify if an 'extended period' meant a specific number of months.
Earlier today, Bank of England, which held the first rate setting session under its new Governor Mark Carney, also initiated the process towards providing forward guidance. Draghi said it was just a coincidence that the ECB and Bank of England chose to give guidance on the same day.
Further, Draghi said policymakers did have an 'extensive discussion' regarding a rate cut today, but were largely divided. He also hinted that the bank could cut its deposit rate, which is already at zero, to boost lending. "We keep an open mind and are technically ready," he reiterated.
"50 basis points in not the lower bound," Draghi said. "Our exit is very distant."
"The ECB remains highly concerned about the state of the Eurozone economy," ING Bank Economist Carsten Brzeski said. "In the near term, a rate cut looks like the most likely policy option if the economy fails to recover."
The ECB expects underlying price pressures to remain subdued and economic activity to stabilize and recover in the course of the year, albeit at a subdued pace. The risks to the inflation outlook are still broadly balanced, while those surrounding the economic outlook remain on the downside, the bank noted.
IHS Global Insight Economist Howard Archer thinks there is every chance that the ECB will eventually take its key policy rate down from 0.50 percent to 0.25 percent as the Eurozone is likely to find it very tough to develop clear growth.
"A failure of Eurozone bond yields to retreat markedly on a sustained basis from recent higher levels would also likely cause the ECB to take its policy rate down to 0.25 percent," Archer said.
Answering questions on Greece, Draghi avoided making any specific comment saying the troika review is underway. However, he said the country has made significant progress in economic reform, which must be acknowledged.
Regarding Portugal, Draghi said the country has achieved remarkable results, if not outstanding. However, the route was painful, he said.
The ECB Chief said Portugal is in 'safe hands' under the new Finance Minister Maria Luis Albuquerque, while adding that credit must be given to her predecessor Vitor Gaspar for the progress made.
Responding to queries on Outright Monetary Transactions, Draghi said OMT is ready to be activated, but is no substitute for government action.
by RTT Staff Writer
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