The European Central Bank has room to cut interest rates further if needed but does not target a specific level for money market rates, central bank Executive Board member Benoit Coeure said on Thursday.
In a speech to the Money Marketeers Club of New York, Coeure also said the ECB’s stated intent to hold its benchmark interest rate low for an extended period had helped anchor the short-term money market rates that banks use when lending to each other.
The ECB broke its tradition of never pre-committing on rates in July, saying it expected its refinancing rate to remain at the current 0.5 percent or lower for an extended period of time.
That announcement came as interbank rates were climbing, pushed up in part by stronger euro zone economic data and higher U.S. bond yields. ECB President Mario Draghi called the rise “unwarranted” and said the central bank had tools to bring the rates down.
One tool, Coeure said, was the ECB’s forward guidance on future rate moves, which “explicitly incorporates an easing bias, thereby accounting for the possibility of further cuts in policy rates.”
A majority of economists in a Reuters poll expect the ECB to keep its key overnight rate at 0.5 percent until at least April of 2015. But instead of cutting rates again, they expect it will serve up another course of cheap long-term loans to banks, possibly by the end of the year.
The ECB’s long-term refinancing operation (LTRO) was designed to prevent interbank lending and loan origination from seizing up as happened during a global credit crunch in 2008.
In late 2011 and early 2012, the central bank extended more than 1 trillion euros ($1.35 trillion) worth of three-year loans to banks, boosting excess cash in the system to some 800 billion euros.
Coeure, whose tasks on the six-person Executive Board include market operations, said another LTRO was just one option among many and said it was not an “urgent decision.”
He also said the ECB had no specific figure for market rates in mind but wants to ensure they aid recovery.
“Our objective is … not to steer money market rates towards a predefined value but to ensure that their fluctuations remain within reasonable bounds and do not hurt economic recovery,” he said.
While it was too early to give a definite answer on whether the ECB’s guidance had worked, he said that it was likely that market rates would be higher without it.
“A number of indicators give us comfort that, in the absence of forward guidance, money market rates would have displayed more upward volatility than was observed,” he said.
“Preliminary evidence suggests that forward guidance has helped to anchor money market conditions in the euro area more firmly to levels which we consider as an appropriate monetary policy stance.”
The 17-country euro zone emerged in the second quarter from a 1-1/2-year recession. Economists polled this month by Reuters predicted it would eke out growth of 0.3 percent for the year. Source: Reuters