Here’s Why the Threat of Rising Bank Rates Worries Mario Draghi

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The European Central Bank’s chief Mario Draghi is attempting to talk market interest rates out of rising, Reuters reports. Draghi will be meeting with the ECB this Thursday to discuss a possible rate change.

After the ECB declared that it would not be raising rates for an extended period in July, some had speculated that the upcoming meeting would lead to a further rate cut. However, a recent upsurge in good economic news for the Eurozone has led most to abandon their predictions and has driven market interest rates upwards. For Draghi and the ECB, this has created concerns that even though the ECB has stated it has no intention to raise rates in the near future, many borrowers in the private markets will be subjected to higher interest rates, which could in turn check a potential economic recovery in the Eurozone.

In addition, some investors have expressed skepticism at the ECB’s promise, citing rumors of tapering quantitative easing from across the Atlantic as well as the ECB’s complete lack of the use of forward guidance up to this point.

One piece of good news for the European Union came with the publication of a report by the Organization for Economic Cooperation and Development, which adjusted its predictions for 2013 growth numbers upwards for France and Germany. France is now slated to post positive economic growth for the year, according to the OECD.

Another welcome statistic came in the realm of economic confidence, which, according to a report released by the European Commission over the weekend, rose for the fourth straight month to put it at its one-year high.

However, concerns still persist over other economic indicators such as unemployment, which has remained at around 12 percent for the Eurozone. Youth unemployment is especially problematic for economically stagnant countries such as Spain, Italy, and Greece, where a potential rise in market interest rates would have the most poignant impact. In already credit-strapped economies, the last things that Draghi and the ECB want to see are prohibitive market interest rates.

One step that Draghi and the ECB might discuss is the creation of a long-term lending facility with a fixed interest rate. The past incarnations of the long-term lending facility, which provided for the lending of over 1 trillion Euros to European banks, were established in the last two years with variable interest rates.

But instead offering a fixed rate, the ECB would be signalling that it really is committed to keeping interest rates at current levels over a relatively long period of time because it would stand to lose money if interest rates were to rise in the interim of the loans from the facility.

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