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Tags: forward | guidance | bankers | rates

Forward Guidance Is Providing Some Security to Markets

Thursday, 29 August 2013 10:14 AM EDT

Major central banks' reassurances that interest rates will stay low for some time are giving markets "a certain security," a European Central Bank policymaker said.

Another European official, however, warned against complacency and said it was too soon to say the eurozone crisis was over.

Ewald Nowotny, a member of the ECB's Governing Council, said the so-called forward guidance from central banks was here because of weak economic growth and high levels of uncertainty.

"That means the central banks are giving markets a certain security that we will have a low level of interest rates for the foreseeable future, no rise but rather steady or lower," he told a panel discussion at an economic conference in Austria.

"But this forward guidance is not unconditional."

The ECB has tied its "forward guidance" on interest rates remaining low to the inflation outlook and monetary dynamics remaining subdued, a scenario that shows no sign of changing any time soon.

Non-eurozone Britain's is tied to unemployment, which the Bank of England also believes will remain stubbornly high for some time.

Nowotny made his comments ahead of an ECB policy meeting next Thursday. A Reuters survey of 60 economists showed the ECB is expected to keep both its main refinancing and deposit rates, now at 0.5 percent and zero respectively, on hold until at least 2015.

The ECB's 23 Governing Council members will meet against a backdrop of improving economic data in the eurozone, though the gradual recovery is uneven and led by Germany, where business sentiment hit its highest level in 16 months in August.

Speaking at the same conference as Nowotny, the European Commission's economic chief said there are signs of a gradual economic recovery in the eurozone but it is premature to say that the crisis is over.

"Let's be clear, especially in view of the dramatic levels of unemployment in many parts of Europe, there is no room for complacency ... Pronouncements that the crisis is over are premature, to say the least," Olli Rehn told reporters.

Rehn later told Reuters that the fragile European economy should continue into next year and become more solid.


Germany and France hauled the eurozone out of a 1-1/2 year-long recession in the second quarter but the recovery is uneven, with much of the periphery still dogged by recession.

Rehn said greater fiscal credibility in eurozone countries, action by the ECB to stabilize markets and better economic governance had all strengthened the currency bloc's ability to withstand political shocks.

He added that Greece was making good progress but a decision on whether Athens may need a third bailout could not be made until the so-called troika of its international creditors completed an assessment in late September and early October.

However, respondents in the Reuters poll attached a 75 percent probability to one of the four countries already under a European Union and International Monetary Fund bailout needing yet another aid package to keep afloat financially.

Greece was the near-unanimous top pick of the economists who thought another bailout was likely, little surprise given Athens and Berlin have talked openly of the prospect of a third, smaller bailout package to cover finances next year.

Economists put a median 35 percent chance a country will ever activate the ECB's Outright Monetary Transactions, a backstop to prevent sovereign borrowing costs spiraling out of control through the central bank purchasing government bonds.

Six months ago, respondents were split on whether the OMTs would be used in 2013. Recent ECB policy has focused on rates.

The bank's policymakers discussed cutting rates in July but decided against it and instead said they would keep them at record lows for an "extended period," the bank's first use of forward guidance, which it reaffirmed after its Aug. 1 policy meeting.

Nowotny called the low current interest rates an historical anomaly, but declined to comment on potential monetary steps to exit the ECB's accommodative stance, citing the quiet period before the central bank's rate meeting next week.

He stressed that policymakers are operating in abnormal times and that central banks had to intervene massively in the face of an economy on the brink of collapse.

"Central bankers have to have in the back of their heads that we cannot repeat the errors of the 1930s," he added.

© 2024 Thomson/Reuters. All rights reserved.

Major central banks' reassurances that interest rates will stay low for some time are giving markets a certain security, a European Central Bank policymaker said.
Thursday, 29 August 2013 10:14 AM
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