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ECB Says Rates Will Stay Low for 'Extended Period'

By David McHugh

FRANKFURT, Germany -- European Central Bank President Mario Draghi has underlined the bank's determination to stick with stimulus for the struggling eurozone, saying the bank will keep its benchmark interest rate the same or lower "for an extended period of time."

The statement followed a meeting of the bank's rate council, which left the refinancing rate for the 17 European Union countries that use the euro unchanged at 0.5%. Draghi said the decision followed "an extensive discussion" of a potential rate cut.

Instead, the bank offered an attempt at what is called "forward guidance" -- a practice already used by the U.S. Federal Reserve to give more clarity about how long it will continue its measures to stimulate the economy.

Draghi rebuffed attempts by journalists at his news conference to pin him down about what an extended period meant. Asked if it meant 6 or 12 months, he said, "an extended period of time is an extended period of time."

He did not specify any concrete targets for unemployment or growth, as the U.S. Fed has done. The U.S. central bank has said its rates will remain near zero until U.S. unemployment falls to 6.5%.

The ECB provided additional guidance by saying that rates would remain low as long as three conditions continued to exist: no threat of inflation, weak economic output and anemic lending by banks. But again, no figures were mentioned.

Still, Draghi was clearly at pains to show the bank as leaning toward doing more, not less to help stimulate the eurzone economy. He said the current record low benchmark rate of 0.5% "is not the lower bound" and said that the bank's statements were intended "to inject a downward bias in interest rates for the foreseeable future."

In theory, a low interest rate could stimulate the economy by reducing borrowing costs on the loans businesses need to expand and create more jobs. The eurozone economy shrank 0.2% in the first quarter, the sixth quarterly decline in a row.

Yet the currently low refinancing rate -- the rate the ECB charges private sector banks to borrow -- is not being passed on by banks. That is because banks themselves often have strained finances and are keeping money back to meet new regulatory requirements aimed at strengthening the financial system.
Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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