The European Central Bank and the Bank of England both took the unorthodox step of offering explicit guidance on low future interest rates yesterday, in what amounted to a transatlantic rejoinder to hints of tightening by the US Federal Reserve.
Dropping a long-standing policy of never "pre-committing" to future interest rate decisions, ECB president Mario Draghi ruled out any rate increase for an extended period, reflecting nervousness about the economic outlook for the bloc.
In London, Mark Carney, the Bank of England's new governor, introduced a similar element of "forward guidance" into a statement on the economy by saying the market's recent expectations of rate rises in 2015 "were unwarranted".
The euro and sterling fell against other currencies while equity markets rallied.
Mr Draghi said the timing of the two announcements was coincidental and denied his institution had been forced into a more dovish communication policy by the Federal Reserve’s recent hints that it would slow the pace of its quantitative easing bond-buying programme, which has sparked turbulence on financial markets.
But, speaking about risks to the economic outlook in the euro area, he also said: “The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions.”
Fed utterances
David Lloyd, head of institutional portfolio management at M&G Investments, said: "The recent market moves were prompted by Fed utterances on QE [quantitative easing] and clearly the ECB and the BoE wanted to say 'hang on' . . . [they] have noted the recent rise in [bond] yields and are taking issue with it."
The ECB’s governing council is to keep its three main interest rates at or below their current level “for an extended period” – a timescale Mr Draghi declined to define more closely, leaving the bank plenty of room to manoeuvre.
While almost no one was expecting the ECB to raise interest rates any time soon, some investors applauded the clarity.
"We realised we'd sort of reached the limits of QE and its effectiveness so it's right to reassure the markets that what they're thinking is correct," said Stewart Cowley, head of fixed income at Old Mutual Global Investors.
“Interest rates are going nowhere for a while so it’s right that Mr Draghi reassures the market that we’re not going to do a volte face.”
'Unprecedented'
The ECB chief also said there had been an "extensive discussion" about a possible interest rate cut and that the decision to offer its "unprecedented" forward guidance had been unanimous – a statement that means Jens Weidmann, president of the hawkish Bundesbank, did not dissent from the view.
The bank cut its main interest rate to 0.5 per cent in May and its deposit rate stands at 0 per cent.
Mr Draghi said the bank kept an open mind on adopting its first negative interest rate in the future.
While the bank still expects a gradual recovery for the euro zone later in the year, Mr Draghi presented recent improvements in business surveys in a more gloomy light than in previous comments, pointing out that the improvement amounted to a slower pace of contraction in the indicators. – (Copyright The Financial Times Limited 2013)
