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Euro Slides as Draghi Commits to Low Rates

Thursday, 4 Jul 2013 | 5:36 AM ET
European Central Bank
Ralph Orlowski | Getty Images
European Central Bank

The euro slid by as much as 0.93 percent against the dollar, falling to a five week low of $1.2885, as European Central Bank (ECB) President Mario Draghi offered the market "explicit" forward guidance, pledging key rates would remain at present or lower levels for an "extended period of time."

Draghi rattled forex markets by saying the ECB's governing council took "unprecedented steps" in giving forward guidance of the bank's plans, putting a downward bias on interest rates for the foreseeable future.

European stock markets reacted positively, rising sharply on Thursday afternoon following monetary policy decisions from both the ECB and the Bank of England - which also offered forward guidance.

"An extended period of time is an extended period of time, it is not six months, or 12 months," said Draghi, when pressed for a time frame by journalists. "Our exit is very distant."

Speaking at a press conference following the ECB's decision to keep its main refinancing rate at a record low of 0.5 percent and deposit rates unchanged, Draghi said he was open to all rate options, including a negative deposit rate.

ECB Leaves Interest and Deposit Rates Unchanged
The European Central Bank has left its main refinancing rate unchanged at 0.50 percent.

Jonathan Loynes, chief European economist at Capital Economics, said the ECB's guidance did not go as far as the U.S. Federal Reserve, which linked policy stance to unemployment rates, but stressed it was more than most were anticipating.

"I think it is a significant departure. This is the first time we have seen an explicit longer-term signal, or at least beyond the very short term," he told CNBC.

"Not only are they pledging to keep rates low for an extended period, he went out of his way to say that another cut was possible and a negative deposit rate was possible as well."

Loynes highlighted that the euro strengthened against the pound following the Bank of England's decision, but that Draghi's comments reversed the move.

"I don't expect this to engineer a recovery in the economy - after all, bond yields and market rates are higher than they were a month ago - but it's a step in the right direction," he added.

Marcus Ashworth, head of fixed income at Espirito Santo Investment Bank, said that so far Draghi had been able to "command control of the markets very successfully, he is a very skilled operator."

The ECB held off on further rate cuts, amid turmoil in Portugal which has led to a jump in bond yields and put the euro zone crisis back in the spotlight. It follows a cut in the bank's interest rate from 0.75% in May - the first reduction in 10 months.

(Read More: ECB, Not Portugal, Is Main Threat to Euro)

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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