ECB – Draghi Promises Rates Will be Lower for Longer

European Central Bank (ECB) President Mario Draghi has stated that the ECB’s low rates will continue for an extended period. This month marks the premiere of forward guidance to the ECB lexicon. Gone are the days of Jean-Claude Trichet, who for eight years as president of the ECB managed to avoid giving straight answers for the most pressing questions on Europe’s economy, while stressing that the ECB never “pre-commits” on monetary policy. Draghi, on the other hand, has tried different approaches.

EUR/USD Daily Forex Graph for July 26, 2013

He has done the bold approach. He pledged to defend the EUR with bravado (“whatever it takes”). At times he has been the face of optimism declaring the “worst is behind us”. Now he has settled on a forward guidance methodology designed to reassure markets after mechanisms such as the Outright Monetary Transactions (OMT) have been muted due to higher yields stateside.

The ECB’s current stance is dovish. Rates have nowhere else to go after sinking to all-time lows. Contrasting the U.S. economic recovery story, Europe is still facing deep unemployment, unresolved bailout concerns, and political fragmentation. The Bank has not clearly outlined which economic indicators it will consider before dictating any policy changes. To fully adopt forward guidance, it will need to move away from the “two pillars” approach of money supply and embrace a wide range of economic barometers.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza