Thursday

22nd Oct 2020

ECB, Germany try to appease markets on euro crisis

  • Draghi (l) has pledged to keep interest rates low for at least a year (Photo: consilium.europa.eu)

The eurozone's central bank (ECB) has attempted to appease markets nervous about the comeback of the euro crisis, by making an unprecedented pledge to keep interest rates low.

The record-low interest rate of 0.5 percent at which banks can lend from the ECB is there to stay, its chief Mario Draghi said Thursday (4 July) after the monthly meeting of the bank's board.

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He also suggested that further rate cuts are possible.

“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Draghi said.

"It's not six months, it's not 12 months - it's an extended period of time," he said.

It is the first time the ECB chief has given an indication of future interest rate decisions. So far, the standard answer to this question was "we never pre-commit."

The move is seen as a reaction to recent hikes in the borrowing costs of Portugal, amid market fears that both and Greece are headed towards another bailout.

Draghi said Portugal was "in safe hands" with the new finance minister after her predecessor resigned following a general strike and protests over austerity measures.

The embattled prime minister, Pedro Pasos Coelho, later on Thursday announced he "found a formula" to continue with the current coalition after the resignation of two ministers.

Meanwhile, in Germany, finance minister Wolfgang Schaeuble said he "fully trusts" the new finance minister, Maria Albuquerque, and sought to downplay the impact the political turmoil could have on the overall eurozone.

"The euro meanwhile has become so stable on international markets that domestic political situations no longer translate into a euro-crisis," Schaeuble said.

On Greece, he noted that the troika of international lenders is currently in Athens and that eurozone finance ministers will get a report on Monday.

"I am confident that Greece is overall making progress. I know it is very difficult, I would not want to be responsible for what they have to account for, but the macro-economic data shows they are on the right path," Schaeuble said.

Schaeuble was speaking after having signed off on a €800 million loan from the state-owned development bank KFW to its Spanish counterpart ICO, in order to help Spanish enterprises.

Spain, the fourth-largest economy in the eurozone, is struggling with recession, unemployment and high lending rates despite a bailout of up to €100 billion for its troubled banks.

The €800 million have to be repaid in ten years at "very favourable rates", the first four years being interest-free, Spanish economy minister Luis de Guindos said during the joint press conference.

"It is about the €800 million, but it is also a sign of trust from Germany in the reforms that are taking place in Spain," German economy minister Philipp Roesler said at the same event.

The moves by both the ECB and the German government are a sign they are "back in crisis mode," even if not as dramatic as the euro-collapse fears of last year, ING chief economist Carsten Brzeski told this website

"There is new nervousness at the ECB, compared to a month ago when they seemed rather relaxed," he said.

The announcement about keeping interest rates low and possibly cutting them further however is mainly due to the fact that the US Federal Reserve has announced it will gradually increase its key interest rate as the US economy is growing again.

"They wanted to make a distinction between the ECB monetary policy and the Fed. But they are clearly still concerned about the economic outlook, since they discussed a rate cut," Brzeski noted.

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