European Central Bank President Mario Draghi said policy makers’ pledge to keep interest rates low explicitly allows for cuts in borrowing costs if market volatility resumes.
“The Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions, should the volatility in money market conditions return to the levels observed in early summer,” Draghi said at the Economic Club of New York yesterday.
ECB policy makers are seeking to prevent volatility in market rates from derailing a euro-area economic recovery that Draghi said was subdued, uneven and fragile. To that end, they pledged in July to keep official interest rates at or below current levels for “an extended period.” Borrowing costs had risen after the U.S. Federal Reserve said it was considering tapering its stimulus later this year.
The overnight rate that banks expect to charge each other by the ECB’s October 2014 meeting, as measured by Eonia forward contracts, was at 0.25 percent in Frankfurt yesterday. The measure was below 0.1 percent in May and climbed as high as 0.37 percent in June before the ECB announced its unprecedented forward guidance.
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