Mario Draghi’s strengthened pledge to keep interest rates low has improved the impact of the European Central Bank’s forward guidance, economists said.
The Frankfurt-based central bank’s vow on borrowing costs has been effective, according to 77 percent of respondents in the Bloomberg monthly survey of economists. That’s up from 68 percent last month and 48 percent when they were first asked in September. The ECB President unveiled the policy in July and said last week that officials chose “firmer words” to emphasize decisiveness and keep a lid on market interest rates.
By refusing to say the fight against Europe’s debt crisis is won, Draghi highlighted the diverging outlooks for the region and the U.S., where the Federal Reserve is tapering monetary stimulus as the recovery strengthens. It’s too soon to say that the region is out of danger, Draghi told reporters on Jan. 9, after ECB officials kept interest rates at a record-low 0.25 percent and didn’t rule out future reductions.
“The repeating and the strengthening of the message had a positive impact in terms of keeping interest rate expectations low,” said Azad Zangana, a London-based economist at Schroder Investment Management, which manages $416 billion in assets. “It’s also supported market expectations that another form of policy action might follow.”
The ECB unexpectedly cut its benchmark interest rate in November in a bid to prevent slowing inflation from taking hold after the rate of price growth fell to a four-year low. The risk is that deflationary pressures become more pervasive, pushing inflation further below the ECB’s target.
“We would certainly be ready and willing to strengthen the forward guidance in the sense that we are absolutely clear that further downside risks to the current scenario would be taken into account,” ECB Executive Board member Benoit Coeure said in an interview in Frankfurt yesterday. “We have been clear on that and we would be very happy to be even clearer if needed.”
Officials will consider “all available tools” to bolster the euro-area’s fragile recovery, Draghi said last week. An “unwarranted tightening of the short-term money markets” or a worsening of the inflation outlook would prompt action, he said.
Draghi’s stronger wording increases the chances of additional action, such as another interest-rate reduction or a extraordinary loans to banks, according to 43 percent of the survey respondents. Fifty-four percent said the outlook for more action was unchanged.
“It does send a signal that they would act if they saw disappointing numbers going forward,” said Anatoli Annenkov, an economist at Societe Generale SA in London. It reinforces the message that officials “take the weakness of the economy very seriously,” he said.
Money market rates rose today after data showed banks’ overnight deposits at the ECB dropped to the lowest level since July 2011. One month forward contracts on the euro overnight index average, or Eonia, rose to 0.20 percent, the most since July 2012.
Draghi may have to do more to beat back deflation, according to Andrew Bosomworth, managing director at Pacific Investment Management Co. and a former ECB economist. Options available to policy makers include charging banks for parking cash in its coffers overnight, issuing more loans to encourage them to lend or starting a Fed-style asset-purchase program.
Seventy-four percent of those surveyed said the likelihood of asset purchases was unchanged after the ECB’s January meeting, while 23 percent said it was more likely.
“The ECB probably needs to get more liquidity into the system, and possibly cut rates further,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Outright asset purchases would be the one they employ if deflation risks really became much more acute and the economic recovery really faltered.”
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