Draghi’s attempt to prevent that renewed optimism from strangling the recovery through a higher cost of borrowing has been only “moderately successful,” he said on Sept. 5 after the ECB held its benchmark rate at a record low of 0.5% for a fourth month.
The U.K. sold 10-year gilts at a yield of 2.98% today, the highest since June 2011. Germany sold 10-year bunds yesterday at 2.06%, the highest in almost two years. The overnight rate that banks expect to charge each other by the ECB’s September 2014 meeting, as measured by Eonia forward contracts, is at 0.25%, near the level before Draghi’s forward guidance on July 4.
Some investors in the survey said that rates would have been higher still had Draghi not introduced guidance, and that points to a qualified success.
“In the short term, the forward guidance has been effective given that the bund yields increased at a slower pace than the Treasuries,” said Cyrus De La Rubia, chief economist at HSH Nordbank AG in Hamburg. “In the middle to long term, the ECB has no power whatsoever to stem a U.S. yield increase on the long end of the curve.”
Draghi reiterated in Riga today that money-market rates are “unwarranted,” while saying the guidance has been “very successful” in reducing volatility. He also said the ECB is “not running out of options, not at all.”
Euro-area industrial output shrank more than economists forecast in July as manufacturers struggled to shake off the legacy of the region’s recession. Factory production fell 1.5% from June, the European Union’s statistics office in Luxembourg said today. That’s more than the 0.3% contraction forecast by economists in a Bloomberg survey. Unemployment held at a record 12.1% in July.
“There is a wider perception that Mr. Draghi and most of his colleagues actually want to keep rates low,” said Alastair Winter, chief economist at Daniel Stewart & Co. in London. “Draghi is rightly very worried about growth and unemployment despite the recent outbreak of joy amongst some investors.”