European Central Bank keeps interest rates level
The European Central Bank is taking a leaf out of the Federal Reserve's book and will, starting next year, set monetary policy every six weeks instead of every month as well as publish minutes to its deliberations.
After the bank decided to keep its interest-rate changes on hold Thursday, ECB President Mario Draghi told a press briefing the new timetable for meetings was not a sign that the bank's job in getting the 18-country eurozone back on track was done.
He said having a meeting every month can cause excess volatility in the markets as traders look for action that is not always merited by the economic fundamentals such as growth and inflation.
"Maybe we should move to a 6-month schedule," he quipped.
Though Draghi insisted that the ECB would not be synchronizing its meetings with the Fed, their timetables are now very similar. The Fed meets eight times a year, usually every six weeks.
The minutes are also a big development, as they will shed more light on the policymakers' thinking and bring the ECB into line with most other major central banks.
"Transparency has been increasingly sought after throughout the financial crisis and the ECB has been very slow to do something that both the Fed and the Bank of England have done for years," said Craig Erlam, market analyst at Alpari.
Draghi also fleshed out details of the ECB's latest plan to flood commercial banks with cash, one of the measures it announced last month, along with interest rate cuts, to help the economy.
One of the problems afflicting the eurozone, which is suffering from anemic growth and low inflation, is that banks often hold back from lending to businesses and households.
Draghi said the new 400 billion-euro ($545 billion) program of loans to banks will help drive inflation back to the target of just below 2 percent from 0.5 percent currently. Under the program, banks can bid for the loans on a quarterly basis, either alone or in a group with other banks. That money would have to then be loaned on to businesses, in the hope of boosting investment and growth.
Draghi said the recovery in the eurozone was moderate in the second quarter and inflation was subdued. Despite that, he claimed long-term inflation expectations were "firmly anchored."
"Geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively, including through effects on energy prices and global demand for euro area products," Draghi said. Markets have been shaken in recent months by violent clashes in Ukraine and Iraq as well as gyrations in fast-growing economies like Brazil and Turkey.
Another risk Draghi identified was that eurozone governments might slow down in reforming their economies.
He said the key interest rate will remain at the current level of 0.15 percent or lower for an "extended period of time" and that the ECB's governing council was unanimous in its commitment to use other monetary stimulus measures should inflation stay too low for too long.
Economic indicators suggest the eurozone economy needs all the help it can get. On Thursday, official figures showed retail sales were flat in May while the June purchasing managers' index — a gauge of business activity — from financial information company Markit edged back to a 6-month low.
The high value of the euro has also been a cause for concern for the central bank. The currency remains relatively strong, particularly against the dollar, even though the Fed is discussing when it will start raising interest rates. Higher rates tend to boost the value of a currency.
Though he stressed that the ECB does not target a value for the euro, Draghi noted the currency's strength was a problem in its effect on prices — its high value tends to make imports cheaper.
The euro fell slightly as Draghi was speaking, though that was mainly due to the bigger than expected 288,000 increase in U.S. nonfarm payrolls in June. The currency was down at $1.3605 from $1.3650 before the payrolls report release. Though it's down on its multi-year high of near $1.40 in the spring, the euro is still markedly above its long-run average.