European central bankers broke new ground to protect their economies from a US-led surge in bond yields, indicating they will keep benchmark interest rates low for longer than investors bet.
With rising market borrowing costs posing fresh threats to weak expansions, Bank of England governor Mark Carney and European Central Bank president Mario Draghi gave greater clarity over their thinking on monetary policy on Thursday in the hope financial markets will correct.
The pound and euro slid against the dollar, while bonds and stocks rose as both officials used rhetoric to distance themselves from Federal Reserve chairman Ben Bernanke's signal that the US is preparing to start unwinding its $US85-billion-a-month bond-buying program later this year. That had sparked a global sell-off in bonds, forcing up yields in economies less able than the US to cope with tighter credit.
"The ECB and BOE are declaring their monetary independence from the rising US rate trend," said Michael Saunders, chief western Europe economist at Citigroup Inc. in London. "It's the right thing to do because European economies need low rates."
Mr Carney, marking his debut at the helm of the BOE as the first foreign governor in its 319-year history, went first as the British central bank released a rare statement in which it said the recent increase in market rates "was not warranted by the recent developments in the domestic economy".
Less than two hours later, Mr Draghi said in Frankfurt that the ECB planned to keep its rates low or even lower for an "extended period" and that it was injecting a "downward bias in interest rates for the foreseeable future".
The central banks turned to words over deeds as both kept their key interest rates at 0.5 per cent, matching the median forecasts of economists surveyed by Bloomberg News. The BOE also left its bond-buying program unchanged at £375billion ($565 billion).
The statements followed a rout in bond markets triggered by Mr Bernanke on June 19. Ten-year UK government bond yields rose to 2.59 per cent on June 24, the highest since 2011. In the euro-area, Portugal's 10-year yields climbed above 8 per cent this week for the first time since November amid concern austerity fatigue is taking its toll. Rates also rose in Italy and Spain, both of which have struggled to grow amid Europe's debt crisis.
With short-term borrowing costs so low, central banks worldwide are increasingly adopting what economists call forward guidance to persuade investors they should restrain yields on bonds. That's vital for the health of economies because it is those longer-term rates that typically dictate the lending rates paid by governments, companies and homeowners.
"What the central banks made very clear is perhaps the relation we saw in the past, where once the US started to hike interest rates, that was closely followed by other central banks. Maybe that is not the case this time around," said Martin van Vliet, an economist at ING Bank NV in Amsterdam.
US central bankers have gone to great lengths to stress that a slowing of quantitative easing doesn't spell an imminent end to low interest rates. Officials are talking about a "dialling back" rather than an exit, according to Federal Reserve Bank of Dallas president Richard Fisher.