ECB and BoE maintain interest rates

Europe’s most powerful central banks have made clear that low interest rates in the EU would go unchanged, amidst growing fears of a tightening US Federal Reserve

 

In separate statements, both the European Central Bank and the Bank of England offered explicit assurances that interest rates in Europe would remain artificially low for the foreseeable future. The announcements were meant to calm investors after US Fed boss Ben Bernanke hinted there may be an end in sight for the central bank’s QE and artificially low interest rates in America.

The BoE’s new boss, Mark Carney, led the charge by releasing a surprise statement of forward guidance after an otherwise dreary rate decision meeting. The bank’s Monetary Policy Committee predictably voted to maintain the rate paid on commercial bank reserves at 0.5 percent. It also agreed to keep the stock of asset purchases being financed by bank reserves at £375bn. Yet officials then released a more forward statement of assurance that the status quo would go unchanged, saying the recent increase in market rates “was not warranted by the recent developments in the domestic economy.”

In a regional show of solidarity, ECB president Mario Draghi immediately followed Carney’s lead. Draghi, who typically avoids publicly “pre-committing” to future interest rate decisions, broke character by resolutely ruling out any potential rate increases. Some analysts were suggesting earlier this week that rates may spike as soon as 2015; however, Draghi dismissed the speculations as “unwarranted”.

Draghi admitted the ECB was keeping an open mind on adopting its first negative interest rate. Not everyone is thrilled about the bank’s strategy

The markets reacted positively to the news. The FTSEurofirst 300 Index closed at 2.5 percent higher – its highest climb since April. Meanwhile, the UK’s FTSE saw its biggest gain in 20 months, at a 3.1 percent increase. Amidst the market uncertainty created by Bernanke’s announcement at the start of the week, as well as a worrying spike in Portugal’s benchmark bond yield, investors applauded the clarity provided by Europe’s central banks.

“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 Old Mutual’s head of fixed income, Stewart Cowley. “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.”

The ECB cut its interest rates to just 0.5 percent in May. Its deposit rate still sits at absolute zilch, and Draghi admitted the ECB was keeping an open mind on adopting its first negative interest rate. Not everyone is thrilled about the bank’s strategy.

Chief economist at Saxo Bank, Steen Jakobsen, said Draghi’s announcement actually made him less confident.

“Ultimately what they are telling (us) is: We have tried everything – now we can only talk to you – dazzle you with our ability to make a song and a dance,” he said Thursday. Other analysts described Carney’s assurances as “jumping the gun”.

Despite the rally of European equities, the euro and the pound fell against other currencies.