Draghi’s promise on interest rates splits ECB watchers

Mario Draghi’s forward guidance on European Central Bank interest rates has split economists down the middle.

Of 31 economists in a Bloomberg monthly survey, 16 said the ECB president’s commitment that official rates would remain at “present or lower levels for an extended period of time” hasn’t been effective. The remainder said it has.

Draghi made the unprecedented vow in July, after the Federal Reserve’s signal that it may start withdrawing U.S. stimulus pushed market rates higher globally. While European borrowing costs initially fell, they have since returned to levels the ECB head called “unwarranted.” That supports the view of some economists that the Frankfurt-based central bank can’t stop rates rising as the 17-nation currency bloc rebounds from its longest-ever recession.

“Bond yields in general across the globe are starting to rise on clear evidence of recovery in the world’s major economies,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “Although the U.S. is more advanced in the recovery than either the euro zone or U.K., and central bankers in Europe are trying to contain market rates, the reality is that bond yields will take their cue from what happens in the U.S.”

Growth Upgrades

Fed Chairman Ben S. Bernanke and his colleagues will decide to trim monthly purchases of Treasuries to $35 billion from $45 billion at this month’s meeting while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a separate Bloomberg survey.

The U.S. economy expanded at an annualized rate of 2.5% last quarter, up from an original estimate of 1.7%, just as the euro area emerged from six quarters of contraction. U.S. jobless claims declined last week to the lowest level since April 2006.

Economists in the monthly survey, which was conducted from Sept. 6 to Sept. 11, upgraded their outlook for the euro area. The economy will contract 0.5% in 2013, compared with last month’s forecast of 0.6%, according to the median estimate. The estimate for 2014 was unchanged at an expansion of 1%.

The ECB forecast on Sept. 5 that gross domestic product will shrink 0.4% this year, compared with a June forecast of 0.6%, followed by growth of 1% in 2014.

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