FRANKFURT – European Central Bank Mario Draghi says the still-fragile euro area economy has a long way to go before the bank raises its key interest rate rises from its current record low.
“I am very very cautious about the recovery,” Draghi said Thursday after the ECB’s governing council kept its benchmark rate at 0.5 per cent.
“I can’t share enthusiasm. The shoots are very very green.”
The 17 European Union member countries that use the euro are only slowly recovering from an 18-month recession. The eurozone economy grew a modest 0.3 per cent in the second quarter after six quarters of decline.
The bank Thursday raised its growth forecast for the euro area for this year to minus 0.4 per cent, up from minus 0.6 per cent. However, the ECB trimmed its forecast for next year by one-tenth of a point to 1.0 per cent.
The ECB head was at pains to reinforce the bank’s stance that it will keep rates at the current low level or even lower for an extended period until the recovery is on stronger footing. Lower rates can stimulate growth.
Draghi said that a rate cut was talked about at the bank’s monthly policy meeting and that some council members felt the recovery is “still too green to exclude this discussion.”
The ECB has held off cutting its own benchmark rate further, and hopes markets will take to heart its promise that rates will stay low or go lower until there are signs the economic pickup is stronger.
Draghi has stressed the bank’s low-rate stance because money market participants don’t all seem to believe him. While the ECB’s benchmark, the rate at which it loans to private banks, hasn’t changed, some money market and bond market rates that determine what banks and companies actually pay for money have risen. The ECB doesn’t want to see that because it could hold back the recovery.
Market rates have gone up because people are anticipating the U.S. Federal Reserve will reduce its bond-buying program aimed at lowering long-term rates, and because of speculation the European and global economy may recover faster than expected. This could push the ECB and other central banks to raise rates sooner than expected to ward off inflation.