The ECB is Keeping Rates Steady: Here’s What That Means

 

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The European Central Bank voted to keep interest rates at their historic lows of 0.5 percent, Reuters reports. At the bank’s monthly meeting in Paris, France, the ECB decided to keep interest rates at their current levels. The move was widely anticipated by economists, coming as no shock to those familiar with the bank’s stance toward the region’s economies. Where many are tuning in, however, is the press conference and comments of Mario Draghi, the chief of the ECB, which happens after the meeting concludes.

Draghi has declared that the bank will hold interest rates at their current levels, or lower, until the eurozone has shown full signs of a recovery. The amount of time that will take, which has not been specified exactly, has been described by Draghi as an “extended period.”

However, some have questioned the bank’s capability to maintain interest rates at such low levels on a medium or long-term basis, even if the policy is successful on an immediate scope.

The task for Draghi at the press conference – much as he has been trying to do in statements made all over Europe over the past months — is to talk down market interest rates to make sure that market rates do not rise prematurely. Rising market rates would constrict access to capital for businesses in the area, all while it making it the more difficult for the ECB to maintain its forward guidance.

So far, there have been no problems, with rates sinking to levels seen over the summer. Skeptics of the policy point to strong economic indicators from the region — including unemployment and manufacturing data, which were released earlier this week — to hint that market rates will be on the upswing earlier than the “extended period” to which Draghi has referred. Still, the numbers have indicated major economic weaknesses in countries such as Greece and Spain, problems that are not likely to be solved overnight.

Draghi’s response has been to reemphasize that he will take whatever steps are necessary to ensure that market interest rates stay low. This could include the development of a third LTRO — a funding instrument that lends money to banks — to show that the ECB is committed to its policy.

Draghi has also discussed the problem of inflation, which sank to 1.1 percent in the month of September, according to recent data. The ECB has stated in the past that its target for inflation is slightly under 2 percent, making the 1.1 number notable not because it is too high, but because it is on the lower side of the acceptable spectrum. With energy prices contributing significantly to the sluggish number, Draghi was not overly concerned about the statistic.

Among Draghi’s other remarks were a display of concern over the U.S. government shutdown and a statement that the ECB does not specifically target exchange rates between the euro and other currencies. His comments seem to have gone over well with the euro continuing to rise through his remarks.

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