Paul Gordon Frankfurt
European Central Bank (ECB) president Mario Draghi was ready to take any necessary measures to keep money market rates in check, he said yesterday as the regulator tries to steer Europe’s banks through the early stages of an economic recovery.
“We’ll remain particularly attentive to developments which may have implications to monetary policy and consider all available instruments,” Draghi said, reiterating comments he made last month. “We have a vast array of instruments to this extent and we exclude no option in order to address the needs as is most appropriate.”
Draghi spoke after the ECB’s governing council left its main refinancing rate at a record low of 0.5 percent for a fifth month. The decision was predicted by all 52 economists in a survey. Officials held the deposit rate at zero and the marginal lending rate at 1 percent.
The ECB is trying to contain volatility in market rates as investors face risks ranging from a squeeze on excess liquidity to stress tests on banks’ balance sheets. Draghi repeated that the ECB was prepared to announce another long-term refinancing operation for Europe’s financial system if needed.
The euro climbed as Draghi spoke, rising as high as $1.3577 from $1.3523 at the start of the press conference. The yield on Germany’s two-year government bond climbed 1 basis point to 0.18 percent.
The ECB pumped more than e1 trillion (R14 trillion) of three-year loans into the financial system during the region’s debt crisis and gave banks the option to repay the emergency cash early. As banks do that, excess liquidity in money markets is declining, pushing borrowing costs higher.
The overnight rate that banks expect to charge each other by the ECB’s September 2014 rate meeting, as measured by Eonia forward contracts, was at 0.22 percent yesterday, compared with less than 0.1 percent in May.
The ECB president said that policymakers considered a cut in its main interest rates and decided against it. Draghi has pledged since July to keep the rates at or below the current level for an extended period.
The euro zone’s economy has shown signs of improving health since last month’s ECB meeting. Last month economic confidence rose for a fifth month and a gauge of factory output expanded a third month. – Bloomberg