ECB's Draghi tries to shepherd markets fixated on Fed

Tue Sep 3, 2013 5:27am EDT
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By Paul Carrel

FRANKFURT (Reuters) - European Central Bank chief Mario Draghi will battle to talk down market interest rates on Thursday but a fledgling euro zone recovery and a looming U.S. Federal Reserve meeting make his job almost mission impossible.

Abandoning its tradition of never pre-committing on future moves, the ECB said in July it would keep its rates at present or lower levels for an "extended period" - its first use of forward guidance.

But the move has failed to convince investors, who have pushed up money market rates in response to stronger economic data and expectations the Fed will begin unwinding its stimulus, possibly as soon as later this month.

The improving economic picture, supported by news on Monday that factories picked up activity in August, has weakened the case for an ECB rate cut when its policymakers meet on Thursday.

"I don't think they'll be discussing a rate cut," said Andrew Bosomworth, a senior portfolio manager at Pimco, the world's largest bond fund.

The ECB debated cutting rates in July but decided against and instead deployed its guidance.

"The good data end up diluting forward guidance," said Bosomworth. "Words are cheap but not as effective as actions."

As with the Bank of England, economic recovery has stiffened market skepticism about the ECB's efforts. Draghi's warning that expectations of rate hikes were "unwarranted" fell flat.   Continued...

European Central Bank (ECB) President Mario Draghi addresses the monthly ECB news conference in Frankfurt August 1, 2013. REUTERS/Ralph Orlowski