Markets Looking to Draghi for Illumination

Mario Draghi has some explaining to do.  A month after the European Central Bank president unveiled a bevy of standard and non-standard fixes for the euro area’s faltering recovery, economists are in disagreement about how long interest rates will stay near zero and in the dark on the details of a plan to boost lending. Draghi may use today’s appearance in Frankfurt as an opportunity to enlighten them.

As the Federal Reserve and the Bank of England feel their way out of crisis-era support for their economies, the ECB is still steering against the risk of a relapse. Draghi’s guidance — should he choose to give any — on how he expects rates to develop over the next two to four years will be crucial in bolstering investors’ optimism that the worst is truly over, while reassuring them that protection won’t be removed before they’re ready.

“My understanding is that Draghi is signaling rates aren’t going to go up before the end of 2016,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “However, the way he has brought the four-year duration of the targeted loans into the equation seems to have been aimed at misdirection, as if he was trying to say rates will stay where they are even longer. But once you start going that far out you lose credibility.”


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