After the European Central Bank broke with tradition and gave forward guidance that interest rates will not rise for an “extended period” and could even fall, some of its members – including French policymakers Benoit Coeure and Christian Noyer, and Bundesbank chief Jens Weidmann – head to an annual gathering in the south of France.
Mark Carney’s Bank of England adopted the same tactic, showing just how alarmed the big central banks are at the potential turmoil unleashed by the Federal Reserve’s money-printing exit plan.
The big question is whether forward guidance can possibly allow them to escape the backwash from the Fed’s “tapering” when it comes or, whether in the euro zone’s case, sovereign borrowing costs will rise further, potentially pushing a number of countries back into danger territory.
An early test will come from today’s key U.S. jobs report. If it comes in strong, European bond yields are likely to rise across the curve.
This was a big move for a central bank which had hitherto spent 14 years insisting it would never “pre-commit” on interest rate policy. But it may not be decisive and further options are limited.
Draghi signalled a further cut in official rates was possible but we know that the transmission of that to the countries that need it most is faulty at best. He also threw the door wide open to push the rate on bank money deposited at the ECB into negative territory. But it’s already at zero and has not encouraged banks to lend much more into the real economy instead.
Most importantly, the OMT bond-buying programme – which has done so much to calm the euro crisis over the last year – is still unused and dormant. Its rules state that a country is only eligible if it first seeks help from the euro rescue fund (being in an existing bailout programme would count) but must also be borrowing regularly on the bond market. That rules out Greece, Portugal, Italy and Spain for now. Ireland might soon qualify but may not need the help. Ironically, the ECB’s first bond purchase scheme, the SMP, which was much more limited in scope, could have been deployed much more easily in this situation.