ECB's Draghi faces questions over guidance on rates
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...