Governor Draghi likes encouraging the markets in July. Just a year ago he said the famous ‘we will do all what is necessary’ to save the euro phrase. On Thursday he surprised by writing that “the European Central Bank will keep rates at current levels (0.5%) or below for an extended period of time.” The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively.
The single mention of a possible lowering of interest rates caused the immediate bullish reaction of markets: the Ibex went from winning 1% to almost 3%, touching 8,000 points, in less than a sigh.
The market expected the ECB to take distance from the US Fed strategy of gradual withdrawal of monetary stimuli. But this is much more than what everyone expected. In fact, most analysts consulted in the Reuters survey thought the interest rates in the euro zone will not change until the end of 2014.
The U-turn taken by the ECB does not only include possible lower rates, but also a negative deposit facility for banks. That is, entities that deposit their money in the ECB’s piggy bank will be punished.
Why has the ECB changed its strategy? Draghi has been quick to clarify that it is not due to a reaction by the decisions of other central banks (the Fed), but nevertheless has acknowledged that in recent weeks there has been a change in the conditions of the monetary markets, which can have effects on the economy. No matter what Draghi says, this is a reaction to the new scenario defined by the Fed.
According to its president, the ECB “will keep rates at current or lower levels for an extended period of time”. This breaks with his traditional refusal to adopt commitments in advance regarding euro zone interest rates. Draghi has been very straightforward on this occasion insisting that guidelines on the rates that have been taken unanimously. Faced questions about whether Germany, a staunch fighter against inflation, also agrees, the President of the ECB has insisted that the decision has been supported by all. “We are aware that the low-rate policies imply certain risks. But at the moment we don’t see those risks,” he has said.
Draghi, as any central banker making a statement, has left some questions open. We don’t know how long will be ‘that extended period of time of low rates’. It can be six months or 12, or who knows if longer.
We don’t know how either to interpret that BIS (the Bank for International Settlements, which coordinates all of the central banks) recommends the central banks to stop their expansionary policies and that the ECB is still insisting on maintaining its expansionary policy as long as it’s necessary.
And we still do not know anything of those other measures that the ECB was preparing make loans get to small and medium-sized enterprises from countries such as Italy and Spain. Mr. Draghi has not mentioned this issue although he recently he said: “If we want to put an end to this crisis, we must put an end to financial fragmentation.”