FRANKFURT, Germany - The European Central Bank and the Bank of England on Thursday underlined their determination to keep interest rates low in an attempt to reassure markets unsettled by the possible end of the U.S. Federal Reserve’s bond-buying program.
Abandoning a longtime practice of saying it “never precommits” on interest-rate decisions, the European Central Bank said it would keep its benchmark interest rate the same or lower “for an extended period of time.”
The statement came after a meeting of the bank’s rate council that left the refinancing rate for the 17 European Union countries that use the euro unchanged at 0.5 percent.
Central bank President Mario Draghi said the decision followed “an extensive discussion” of a potential rate cut.
Instead of a cut, the bank offered what is called “forward guidance.” The practice - already used by the Fed - is designed to give markets clarity about the central bank’s future course of action in order to influence and reassure markets.
The Bank of England did something similar at its monthly meeting Thursday. Under a new governor, Mark Carney, the bank issued a statement saying expectation of a rate rise “was not warranted.” The bank also kept its main interest rate at 0.5 percent.
The bank has so far pumped $579 billion into Britain’s economy since 2009. Under the program, the Bank of England buys bonds from financial institutions with newly created money. The hope is the extra money will boost lending, helping economic growth.
In a statement, the Bank of England hinted it would keep monetary policy loose to keep borrowing rates down.
It said that since May, “there have been further signs that a recovery is in train” but the recovery was weak by historical standards. It expects inflation, which is at 2.7 percent, to slow to the bank’s 2 percent target. That should allow the bank to keep its monetary policy loose for some time - unlike the Fed, which is planning to rein in its stimulus.
Markets reacted dramatically to the two banks’ statements. In London, the FTSE 100 index of leading shares closed up 3.1 percent, while Germany’s DAX stock index ended Thursday 2.11 percent higher.
The central bank statements contributed to strong declines in the euro and British pound against the dollar. Looser monetary policies tend to weaken a currency as low interest rates mean lower returns on investments and more attractive opportunities can be found elsewhere. The euro fell 0.7 percent to $1.2916, while the British pound fell 1.4 percent to $1.5066.
Financial shares were among the strongest gainers, with Royal Bank of ScotlandPLC stock rising 5.1 percent, Barclays PLC up 4.7 percent and HSBC PLC up 4.6 percent.
The goal of the European Central Bank and the Bank of England was to keep bond market interest rates from rising and hurting economic growth through higher borrowing costs. Market rates have crept up since the Fed signaled last month that it could begin phasing out its bond-buying program this year.
The Fed program - known as quantitative easing - has been sending fresh money into financial markets, driving bond prices up and keeping borrowing costs down. Word the Fed might scale back soon sent this into reverse.
Analyst Christian Schulz called the European Central Bank guidance a “mini-revolution” because the central bank abandoned its long-standing catchphrase that it “never precommits” on its policies.
“This is a weak form of forward guidance. But it is guidance nonetheless,” Schulz wrote in a note to investors.
At his news conference after the central bank’s meeting, Draghi rebuffed attempts by journalists to pin him down about what an extended period meant, saying, “An extended period of time is an extended period of time.”
He also did not specify any concrete targets for unemployment or growth, as the Fed has done. The U.S. central bank has said its rates will remain near zero until unemployment falls to 6.5 percent.
Still, Draghi was clearly at pains to show the European Central Bank as leaning toward doing more to help stimulate the eurozone. The central bank president said the current record low benchmark rate of 0.5 percent “is not the lower bound.”
He added that the bank’s statements were intended “to inject a downward bias in interest rates for the foreseeable future.”
The European Central Bank added that rates would remain low so long as three conditions continued to exist: no threat of inflation, weak economic output, and anemic lending by banks. But no figures were mentioned.
The eurozone economy has struggled because of the region’s government debt crisis, which has forced countries to cut back on spending and raise taxes to try to reduce levels of debt. Economic output shrank 0.2 percent in the first quarter, the sixth quarterly decline in a row.
Growth is key to getting the eurozone out of its problems. An expanding economy increases government tax revenue as people and businesses earn more. And it reduces the size of debt relative to the size of the economy.
In theory, a low interest rate could stimulate the economy by reducing borrowing costs on the loans businesses need to expand and create more jobs.
Yet the currently low refinancing rate - the rate the central bank charges private-sector banks to borrow- is not being passed on by banks. That is because banks themselves often have strained finances and are keeping money back to meet new regulatory requirements aimed at strengthening the financial system.
So there is skepticism among economists and central bank leaders themselves about how much good another rate cut will do. The bank has already cut interest rates, made cheap three-year loans to banks, and offered to buy the government bonds of indebted countries in the open market if they promise to overhaul their finances.
Much attention has focused instead on tools the European Central Bank could use beside rate cuts to try to get the economy going again. Forward guidance was one of those.
The bank also has said it is looking at ways to promote lending to small companies, working in cooperation with other EU institutions. However, it cannot do that alone. It would take months to set up measures - such as bundling small-business small loans into securities that could then be sold off - so that more money could be freed up for banks.
Meanwhile, the leaders of Portugal’s governing coalition parties remained locked in negotiations Thursday as they attempted to repair differences that threatened to pitch the bailed-out country into turmoil and reignite concerns over Europe’s debt crisis.
Prime Minister Pedro Passos Coelho, head of the senior coalition partner, and the leader of the junior partner, Popular Party chief Paulo Portas, met three times in 24 hours in an attempt to avoid the government’s collapse in a dispute over austerity measures and other reported grievances concerning the relative standings of the two parties within the coalition. There was no immediate word on the progress of the talks.
Portugal’s political stability, certainly compared with turmoil in Greece, has helped ease investor concerns over the country’s financial fate since a $101 billion international rescue two years ago.
The relatively calm backdrop helped lower Portugal’s borrowing costs and allowed it to enact a raft of economic changes that Draghi on Thursday described as “remarkable.”
German Finance Minister Wolfgang Schaeuble said he didn’t expect any contagion from Portugal’s difficulties to spread to the 16 other European countries that use the euro currency.
“I think the euro is now viewed on the world’s financial markets as so stable that domestic political situations in individual countries … don’t mean a crisis for the stability of the euro as a whole,” Schaeuble said in Berlin.
Information for this article was contributed by David McHugh, Danica Kirka, Barry Hatton, Geir Moulson,Toby Sterling, Kay Johnson and Pan Pylas of The Associated Press.
Front Section, Pages 7 on 07/05/2013