The European Central Bank on Thursday strengthened its commitment to ultra-low interest rates as its president Mario Draghi said it was too early to declare the eurozone debt crisis over.

 

Tumbling sovereign bond yields in crisis-hit countries and better than expected economic data in recent weeks have raised hopes that the recovery is gathering pace, with confidence among businesses and households now at its highest level for two-and-a-half years.

 

But Mr Draghi dismissed as “premature” upbeat comments from José Manuel Barroso, European Commission president, who on Wednesday predicted that the eurozone would put the crisis behind it in 2014.

 

The ECB president instead struck a dovish tone, stressing that the economy remained “fragile” and hardening the central bank’s language on interest rates. The ECB “strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary”, he said.

 

Mr Draghi’s comments threw into sharp relief the differing approaches of western central bankers. The US Federal Reserve is scaling back its quantitative easing programme while the Bank of England is under pressure to raise rates as the UK economy recovers, whereas Mr Draghi is adamant that the ECB stands ready to do more if conditions worsen.

 

“The strengthening of the forward guidance effectively underscores that the ECB along with the Bank of Japan is at the back of the policy tightening queue, in contrast to the Fed and the Bank of England,” said Marc Ostwald, strategist at Monument Securities.

The euro fell to a one-year low of 82.27p against sterling. It slipped around 0.5 per cent from its peak against the dollar immediately after Mr Draghi spoke, although it later recovered.

 

Mr Ostwald added: “The euro is slightly weaker, but further weakness will more than likely require a less dovish tone from the Fed, and action from the ECB.”

 

Although rate-setters on the governing council opted to keep rates on hold at 0.25 per cent, the ECB president said policy makers “remain determined to maintain the high degree of monetary accommodation and take further decisive action if required”.

Mr Draghi signalled the central bank would act if there was an “unwarranted” tightening in money market rates or if medium-term inflation expectations drifted down from the central bank’s target of just below 2 per cent.

 

Eonia overnight lending rates, which track the cost at which financial institutions can borrow from each other, spiked at the turn of the year as the region’s banks demanded levels of liquidity not seen in one-and-a-half years. Demand for liquidity and overnight lending rates often creep up towards the turn of the year as banks look to window dress their balance sheets.

The ECB president refused to be drawn on what policy measures the central bank was likely to take should money market rates climb higher or price pressures dissipate.

 

“We have several instruments that we can use and their choice ... will depend on what contingency will actually happen,” he said. “So I think at this point in time it’s pointless to speculate which instrument we would use.”

Mr Draghi downplayed fears of Japanese-style “lost decade” after core inflation in the eurozone fell to a fresh record low of 0.7 per cent in December. He blamed the dip on a statistical quirk in how Germany calculates services inflation.

 

Source: FT

 

 

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