News Column

Eurozone Interest Rates Likely To Remain Low Until 2016

June 23, 2014

VIENNA (Alliance News) - The European Central Bank is unlikely to hike interest rates from record lows until 2016 as it waits for the economic recovery to gain a strong footing, ECB President Mario Draghi and Governing Council member Ewald Nowotny said in separate comments over the weekend.

"We have prolonged banks' access to unlimited liquidity up to the end of 2016. That is a signal," Draghi said in an interview to the Dutch newspaper De Telegraaf on June 21.

"Our programme in support of bank lending to businesses will continue for four years. That shows that interest rates will remain low over a longer period. But thereafter they will increase when the recovery will firm up."

Elsewhere, Nowotny said low interest rates were not permanent and they will start to rise when there was concrete evidence of Eurozone recovery gaining momentum.

"Once there is significant growth, more than two %, the rate reversal will occur, but from today's perspective this will hardly be before 2016," Nowotny said in an interview to the Austrian daily Kronen Zeitung, also on June 21.

Earlier this month, Draghi steered ECB in taking the historic move of cutting interest rates to negative territory as low inflation threatens to derail the euro area's fragile economic recovery.

The bank cut the deposit rate to -0.10% and announced EUR 400 billion targeted longer-term refinancing operations that will mature in September 2018.

Nowotny said the bank had to act this month to prevent a new economic crisis.

Eurozone recovery is "still weak and unevenly distributed" and "is vulnerable", Draghi said. "Accidents could happen in the global economy that can quickly change the situation."

He also pointed out that very high unemployment alone poses a risk to euro area recovery as it leads to lower consumer demand. Comparing the euro area recovery to those in the US, the UK and Japan, Draghi said it is at an earlier stage.

The sentiment was echoed by Nowotny, who said there were just green shoots of recovery in euro area. He also noted that the cheap money are not finding its way to businesses.

"The psychological mood is lacking a bit," Nowotny, who heads the Oesterreichische Nationalbank, added.

Further, an unwarranted tightening of the monetary policy stance mirrored in an increase in short-term interest rates could prompt the ECB to take action, the central bank chief reiterated.

Ongoing weakness in lending as well as a deterioration in inflation expectations could also induce the bank to act, he added. The third scenario may also prompt the bank to consider quantitative easing or purchase government bonds, Draghi said.

"Quantitative easing can include not only government bonds, but also private sector loans," Draghi said. "We will discuss that when the time comes."

Meanwhile, Nowotny said the banking reforms were essential to ensure a stable banking system in the region.

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Source: Alliance News

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