ECB to reassure markets on ‘exit’

FRANKFURT - Agence France Presse

The European Central Bank’s main challenge at its monthly policy meeting next week will be to persuade markets that it has no plans in the foreseeable future to start raising interest rates, analysts said.

Financial markets have been spooked by the announcement earlier this month that the US Federal Reserve is preparing to phase out its bond-buying or so-called “quantitative easing” programme, bringing the prolonged period of loose monetary policy to an end.

In response, sovereigns yields have risen across the euro area and financial conditions have generally tightened, albeit not dramatically.

It was enough, however, to persuade ECB officials to publicly proclaim that the period of low interest rates is not going to come to an end on this side of the Atlantic. Central banks in the industrialised world have been keeping interest rates at all-time lows, thereby lending money cheaply, in a bid to stimulate the ailing economy.

The overall economic outlook for the 17 countries that share the euro “still warrants an accommodative stance and an exit is still distant,” ECB chief Mario Draghi told a congress in Berlin last week.

And another top ECB official, executive board member Benoit Coeure, said: “At the current juncture, there should be no doubts that our ‘exit’ is distant and our monetary policy is and will remain accommodative.” ECB watchers are therefore convinced that while no new policy moves are on the cards at the bank’s governing council meeting on July 4, Draghi will be at pains to rule out any reversal in interest rates in the foreseeable future. “With the news that the US Fed is set to taper its QE programme hitting eurozone financial markets, president Draghi should provide reassurance about ongoing ECB policy support,” said Capital Economics economist Jennifer McKeown.

“While we do not expect policy changes this month, Draghi is likely to confirm that the ECB is considering various conventional and unconventional policy options,” she said.

‘Ready to react’

At its June meeting, the ECB held its key rate unchanged at a current record low of 0.5 percent and Draghi insisted at the time that the bank stood “ready to act to given the eurozone economy a much-needed shot in the arm.

But analysts are divided whether that will mean further cuts in interest rates, particularly as that would involve one of the ECB’s key rates, the deposit rate, entering into negative territory.

The deposit rate has been held at zero percent since last year and taking into negative territory -- where the ECB would actually charge banks to park their cash with it -- could have unintended consequences, analysts say. “Given the upbeat survey data since the meeting ... it is hard to see the council cutting rates,” said RBS economist Richard Barwell.

“We remain of the view that a cut in the deposit rate into negative territory is highly unlikely. The most likely form of guidance is a statement that exit is ‘very distant’,” Barwell argued.

 McKeown at Capital Economics disagreed. “We still the that the bank’s next move will be to reduce both the main refinancing and deposit rates to 0.25 percent and minus 0.25 percent respectively,” she said.

“On the assumption that the economy fails to show convincing signs of recovery in the meantime, we are pencilling this move in for September.” Draghi has said.