ECB's Draghi faces questions over guidance on rates

Tue Jul 1, 2014 8:31am EDT
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By Paul Carrel

FRANKFURT (Reuters) - European Central Bank President Mario Draghi faces a grilling after Thursday's policy meeting over forward guidance on interest rates after he hinted at a stronger message last week without being specific.

To breathe life into a sluggish euro zone, the ECB cut interest rates to record lows at its June 5 meeting, launched a series of measures to pump money into the economy and pledged to do more if needed to fight off the risk of Japan-like deflation.

The steps to pump out money included extending the duration of unlimited cheap liquidity for banks until the end of 2016, and offering them a four-year loan plan - or TLTRO - to borrow at a slight premium to regular ECB funding operations.

Draghi said these two steps meant "interest rates will stay low for long, possibly longer than previously foreseen".

His message presented banks with a conundrum: if the guidance is underpinned by the TLTROs, that suggests rates could remain on hold until 2018 - in which case there is no incentive for banks to pay extra for the four-year funds.

Banks will be charged a 10 basis point premium over the ECB's main funding operations for the four-year TLTROs, targeted measures aimed at increasing their lending to businesses.

The four-year loans would act as a hedge against early policy tightening, however. Only last year, the Bank of England was talking about rates staying at record lows into 2016. Now, the consensus is that a first upward move could come this year.

Britain's economic recovery is well in advance of the euro zone's - and there is no threat of deflation in the UK - but any view of where interest rates rely four years hence is freighted with uncertainty.   Continued...

European Central Bank (ECB) President Mario Draghi addresses the monthly ECB news conference in Frankfurt June 5, 2014. REUTERS/Ralph Orlowski