ECB has no plans to raise rates for ‘foreseeable future’

Financial markets should not expect the European Central Bank to raise interest rates for the foreseeable future as long as expectations for inflation remain steady, European Central Bank policymaker Ewald Nowotny said.

He also told reporters that turmoil on emerging markets was not having a direct impact on the eurozone so far, but that it was premature to say this would remain the case.

“The forward guidance of the ECB is a clear statement that means that monetary policy will be conducted so that interest rates will remain at the current rate or lower,” he said. “The translation is that for the foreseeable future interest rate rises are ruled out.”

He added: “Some (ECB policymakers) ... interpret this differently, but this from my side - and I believe what has been approved by the ECB president - is the applicable interpretation,” he added.

The central issue, Mr Nowotny said, was “the stability of inflation expectations” and that as long as these were stable the forward guidance signals to markets would be that they do not have to expect a rate rise.

The next ECB policy meeting is on Thursday, where the governing council members will meet against a backdrop of improving economic data in the eurzone, but the gradual recovery is uneven and led by Germany, where business sentiment hit its highest level in 16 months in August.

Mr Nowotny, governor of the Central Bank of Austria, said turmoil in emerging markets was not having an impact so far on the eurozone economy.

“It has had more the effect that for example financing conditions have improved for European states, particularly the rather weaker states. For the medium term this (fallout) is possible but it is too early to say,” he said.

Developing markets have borne the brunt of investor unease over a possible US-led military strike on Syria as well as expectations the US Federal Reserve will soon scale back its economic stimulus.

Mr Nowotny said the issue of the Fed tapering its bond-buying programme, possibly as early as next month, was primarily a psychological one.

“The Fed at the moment is buying $85 billion a month in either government or mortgage securities and the whole discussion is really about whether I buy maybe $50 billion instead of $85 billion,” he said.

Unlike the Fed, the ECB moved to shore up confidence by providing cheap three-year loans to banks.

When these loans mature or banks repay them early, it acts as a kind of “quasi-automatic” way to exit extraordinary provisions of liquidity to help weather the financial crisis, Mr Nowotny added.