It’s official – ECB will likely keep rates low until 2016

The European Central Bank is unlikely to raise interest rates from record lows until 2016 when the eurozone economy starts to pick up more strongly, ECB Governing Council member Ewald Nowotny said in a newspaper interview.

“Interest rates will turn as soon as there is clear growth, so more than 2%, but from today’s perspective that will hardly be before 2016,” he said in an interview with the Krone paper that was posted on its website at the weekend.

 

He said a recovery in the eurozone was showing only signs of green shoots and the ECB’s cheap money was not always making its way to companies wanting to borrow. “The psychological mood is lacking a bit,” he said.

ECB staff forecast this month that the eurozone economy would grow between 0.5 and 3.1% in 2016.

The ECB on June 5 cut interest rates to record lows — and the deposit rate to below zero — and launched a series of steps to boost lending to companies.

“We had to react to prevent a new economic crisis,” Nowotny told the paper.

ECB President Mario Draghi also said in a Dutch newspaper interview at the weekend that rates would stay low for some time.

“We have prolonged banks’ access to unlimited liquidity up to the end of 2016. That is a signal. Our programme in support of bank lending to businesses will continue for four years. That shows that interest rates will remain low over a longer period,” Draghi told De Telegraaf.

Meanwhile, another ECB executive warned against proposals by centre-left leaders in Europe to relax EU public deficit rules, in comments published in a German newspaper yesterday.

“The Stability and Growth Pact should not be relaxed to the point where it loses its credibility,” ECB executive board member Benoit Coeure was quoted as telling the Frankfurter Allgemeine Sonntagszeitung.

“Let’s not repeat the mistakes of 2003”, when Germany and France breached the strict budget rules, he told the conservative newspaper.

In the debate over how to revive crisis-hit economies, countries including France and Italy have called for more flexibility and time in meeting the strict conditions of the Stability Pact.

Under the EU’s rules, public deficits — the shortfalls between government income and spending — should not exceed 3.0% of annual gross domestic product.

Accumulated debt, the sum of all those annual deficits, is supposed to be kept at 60% of GDP, under the EU’s Stability and Growth Pact.

Germany’s vice chancellor and economy minister, the Social Democrat Sigmar Gabriel, recently suggested that economically embattled countries be offered some latitude in meeting EU rules while they got their finances in order.