Europe’s major central banks changed neither interest rates nor other stimulus measures Thursday, but their shift in communications sent global markets surging.
The takeaway from meetings of the European Central Bank and the Bank of England was one of “dovish” central bankers with a new style, if old actions.
Both held their benchmark rates steady at 0.5 per cent, and kept the level of asset purchases unchanged.
Thursday also marked the first policy meeting of the Bank of England under its new governor, Mark Carney, late of Canada. The central bank’s comments drove down the British pound, and sent London stocks surging.
“While interest rates and broader central bank policy was left unchanged by both the Bank of England and the European Central Bank today, the shift in tone in terms of communication appears to have caught markets completely off guard, with the result that equity markets have kicked sharply higher, while the pound and the euro have slumped sharply,” said senior analyst Michael Hewson of CMC Markets in London.
London stocks rose by 3 per cent, while those in Germany and France also climbed, though to a lesser extent.
Mr. Draghi said the outlook for the troubled euro zone is one of risks, but the climate has improved, as certain economic readings have demonstrated.
“Recent developments in cyclical indicators, particularly those based on survey data, indicate some further improvement from low levels,” he told reports after the ECB decision.
"Looking ahead to later in the year and to 2014, euro area export growth should benefit from a gradual recovery in global demand, while domestic demand should be supported by the accommodative monetary policy stance as well as the recent gains in real income owing to generally lower inflation," he said.
"Furthermore, notwithstanding recent developments, the overall improvements in financial markets seen since last summer should work their way through to the real economy, as should the progress made in fiscal consolidation."
But, taking a page from the Bank of Canada and the Federal Reserve, it was this comment that made investors sit up and take notice: The ECB’s policy-setting panel "expects the key ECB interest rates to remain at present or lower levels for an extended period of time."
That’s new from the ECB, a method seen as giving markets and businesses some assurances on interest rates.
In the case of the Bank of England, the comment that garnered much attention was its suggestion that market interest rates have climbed too fast, and that expectations for a central bank rate hike are overdone.
What both central banks accomplished was a signal to the markets that stimulus measures won’t be pulled back any time soon, important given the speculation on the timeline for the Federal Reserve.
The U.S. central bank has indicated it could begin to pull back on its asset-buying program in the fall, and possibly end it completely next year. This has roiled markets as investors want to be sure that the economy, and the markets, can withstand it.
“Following the significant back-up in global bond yields over the past couple of months, central bankers are doing their utmost to clarify that policy rates will remain near zero for an extended period,” said senior economist Benjamin Reitzes of BMO Nesbitt Burns.
“These actions should help limit increases in bond yields in the U.K. and Europe, even as Treasury yields grind higher amid Fed tapering speculation.”
Senior market strategist Brenda Kelly of IG in London agreed.
“While both interest rates remained unchanged, the central banks appeared to be at pains to appease investors’ fears that tighter monetary policy was imminent,” she said.
“While we cannot suggest that this was a co-ordinated move from both central banks, there is a certain tendency to assume that this unprecedented rhetoric could be an attempt to temper the recent hawkish tones emanating from the U.S. Federal Reserve.”