When the European Central Bank maintained its key interest rates at record lows last week, as expected, it also sent a far bigger message that a central bank revolution was underway.
ECB chief Mario Draghi felt compelled to spell it out to reporters at his regular monthly news conference.
“You haven’t really listened very carefully to my statement,” Draghi scolded a journalist.
“The governing council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past,” he said.
“The governing council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
In the world of central banking, where a governor’s every word is weighed and pored over by analysts, the comments were dynamite.
Stock markets across Europe rallied strongly and the euro fell against the dollar.
After 15 years of saying that it will never “pre-commit” to future interest rate moves, the ECB was giving an assurance that interest rates will not rise for quite some time.
Less than an hour earlier, the Bank of England’s new chief, Mark Carney, had rung in a mini-revolution of his own.
In a much more coded statement, the Canadian — who had been in the job barely a week — said that market expectations of rate rises in 2015 were “unwarranted.”
ECB chief Draghi was at pains to point out there was no coordination between the statements.
But central bank watchers see them as a response to the US Federal Reserve which triggered renewed tensions in the financial markets recently by hinting that the prolonged period of easy money is coming to an end.
Financial markets have been spooked by the announcement last month that the US Fed is preparing to phase out its bond-buying or so-called “quantitative easing (QE)” loose monetary policy.
And political turmoil in Portugal had sparked concern at the prospect of a new flare-up in the eurozone crisis.
In response, interest rates on sovereign debt have risen across the euro area — and in emerging markets — and financial conditions have tightened.
“The ECB and the BoE are answering back,” said analysts at UniCredit.
“European central banks are starting to fight the Fed. The ECB is rewriting history,” said Commerzbank’s Rainer Guntermann.
For Carsten Brzeski at ING DiBa, the turnaround amounted to a “mini revolution” and was a sign of the ECB’s coming of age.
“In fact, over the last months, the ECB has been following the Fed’s footsteps: more focus on growth with explicit mentioning of high unemployment and now the forward guidance,” the expert said.
ETX Capital trader Ishaq Siddiqi said that the ECB and BoE would cool market volatility because now “investors will not have to speculate the central banks will hike rates any time soon.”
And while one central bank — the US Fed — “may be stepping out of the quantitative easing game … accommodative easing is not over in the UK and Europe for at least another two years,” Siddiqi said.
But others were more critical.
“This preoccupation with forward guidance is a load of old nonsense, it does nothing to boost company profits and only serves to drive asset bubbles,” said CMC Markets analyst Michael Hewson.
“It may keep interest rates low but this is not a liquidity crisis in Europe, it’s a solvency crisis. If markets need comfort from mere words, it merely serves to highlight the abject failure of politics and economic policy globally.”
Research published recently by economists at the Bank for International Settlements in Basel, Switzerland — the so-called central bankers’ central bank — commented that “adopting QE was the easy part.”
The easy money had depressed rates and enabled governments to refinance growing debt on the cheap, they said.
