What Will Be the Next Move of the European Central Bank?

European Union

A Bloomberg poll of economists casts light onto expectations of what actions the European Central Bank will be taking in the near future, the news agency reports. The majority of the economists surveyed believed that the bank would stay true to its word and leave interest rates at their current historic lows of 0.5 percent through at least mid-2015.

This would constitute the “extended period” to which Mario Draghi, the head of the bank, referred when he put in place the bank’s forward guidance this summer, in which he pledged to keep interest rates at their current levels or below until a recovery was in full swing.

Also included in the poll was a survey of what other measures the bank could take. What seemed to be a popular call among economists — and one that Draghi himself has hinted at — is the creation of another LTRO, or long-term lending operation. The operations, of which there have been two so far, provide billions of euros in loans to banks at low rates, giving banks a generous repayment schedule.

Such a move would have two major advantages. First, it would show the European Central Bank’s commitment to its policy, as raising interest rates once the LTRO has been established at lower rates would be very costly to the bank. This could help quell fears that market interest rates will rise on expectations ahead of any increase made by the ECB.

Additionally, the tactic would increase liquidity in the eurozone. With banks repaying money from the first two LTROs ahead of schedule, Draghi has previously stated that liquidity is once again on the low end of the spectrum, and the creation of an LTRO would provide an easy fix to the potential problem.

For his part, Draghi was seen speaking in Harvard yesterday on some of the guiding principles behind the European Union. He compared the progress of the European Union to the formation of a “more perfect union,” noting that the process was always ongoing and required constant vigilance.

However, some of his words were more stark. He called the euro “an irreversible single currency,” a phrase that supporters of the anti-European Union Alternative for Germany party would probably disagree with.

Draghi also took the opportunity to reaffirm his support of a European banking union. To Draghi, the step is absolutely paramount, not only because it helps to stabilize the banking system of the region, but also because it will bolster the long-term health of the euro. The ECB is on track to become the supervisor of eurozone banks as early as the end of next year, with an asset quality review of banks’ balance sheets already in the works.

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