Draghi’s time horizon for rates seen to exceed a year

For Mario Draghi, “an extended period of time” lasts longer than a year, according to economists surveyed after the European Central Bank president used the phrase in a pledge to keep interest rates low.

More than three-quarters of respondents in the Bloomberg monthly survey of 50 economists said that Draghi’s definition is more than 12 months, while 10 said it could be anywhere between six months and a year. The Frankfurt-based central bank will keep its benchmark interest rate unchanged until at least 2015, the median forecast of 34 economists shows.

Draghi’s unprecedented guidance last week that benchmark borrowing costs will stay at their present level or lower for a while has since sparked speculation on how long a timeframe he committed to. The euro dropped a cent on July 9 after Executive Board member Joerg Asmussen said he meant more than 12 months. The ECB clarified the the remark within hours and Executive Board member Benoit Coeure told Bloomberg Television today that officials will reassess its guidance every month.

“Short-term forward guidance doesn’t make sense because it won’t have an impact on the market,” said Kristian Toedtmann, an economist at Dekabank in Frankfurt. “The criteria Draghi cited reflect a commitment for a longer period of time.”

The ECB’s guidance “is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics,” Draghi said on July 4. “It is not six months, it is not 12 months -- it is an extended period of time.”

Monthly Reassessment

Asmussen didn’t intend to provide a comment on “the exact length of this period,” the ECB said in an e-mailed statement after Germany’s representative on the central bank’s board told Reuters Insider TV that the guidance goes beyond 12 months.

“It will be reassessed Governing Council after Governing Council,” Coeure said in an interview with Bloomberg Television in Paris today. “Forward guidance is not a shift in our strategy.”

The ECB said today in its monthly bulletin the commitment covers a “flexible horizon which does not pre-specify an end- date” and is “consistent but not directly linked” to the pledge to provide banks with unlimited liquidity through the first half of 2014.

Draghi’s outlook on borrowing costs followed Federal Reserve Chairman Ben S. Bernanke’s signal that the U.S. is preparing to start tapering its $85 billion-a-month bond-buying program later this year. That announcement had sent bond-yields spiraling in Europe’s debt-strapped periphery, threatening the economic recovery the ECB predicts for the end of the year.

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