Draghi bank sweetener hinges on view for exit from low rates

By Jana Randow

Mario Draghi’s latest stimulus tool contains a hidden message: If you think interest rates will rise before 2018, take the money now.

The European Central Bank president has offered lenders a fresh round of cash for as long as four years to keep them afloat and make them support an economic recovery by encouraging lending. He’s also inviting bets on when the ECB will scale back its ultra-loose monetary policy -- the more a bank expects borrowing costs will rise over the term, the more attractive the loan looks.

Four weeks after the ECB unveiled an unprecedented plan for boosting the euro area’s floundering revival, economists and investors are still grappling with its intricacy. While Draghi is trying to reassure investors that the ECB will keep policy loose for longer than the U.S. Federal Reserve and Bank of England, the link between the size of stimulus now and the prospect of higher rates later is a reminder that cheap money won’t be around forever.

“Draghi’s latest move has stepped up the complexity of monetary policy, though simpler options exist,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich. “I’d reserve judgment until we see results from the economy, but if I were trying to make a guess, it would be a 50-50 call whether it’s going to work or not.”

Low Inflation

So far, the ECB’s package has prompted a plunge in money markets. Overnight interbank borrowing costs in the currency bloc have averaged 0.06 percent this month compared with 0.25 percent in May. That’s probably enough to stave off further action for now. The Governing Council will keep interest rates unchanged when it gathers in Frankfurt on July 3, according to Bloomberg surveys of...