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Markets soar as central banks pledge to keep interest rates low

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Mark Carney made his first foray into the public eye as the Governor of the Bank of England when he made the highly significant statement that investors were “not warranted” in believing that interest rates would begin to rise from the end of next year, as is the received wisdom. This was effectively a guarantee to continue delivering economic stimuli and keep the price of borrowing low. His message was almost immediately echoed by Mario Draghi, the European Central Bank president, who stated that interest rates would remain at or beneath current levels “for an extended period of time”.

Despite this overt insight into interest rate timeframes being highly unusual, it seems that Mr Carney is determined to put his stamp on things with the kind of communication and market guidance that garnered him a reputation as a monetary dove. Yields on government bonds had risen in recent weeks after the US Federal Reserve began hinting that it may reduce its economic stimulus program, sending markets into a mild panic. With both the ECB and the Bank of England categorically declaring that that wouldn’t be the case, the markets rocketed and the pound fell.

The FTSE 100 leapt after the Bank’s statement and leapt once more after Mr Draghi joined the debate. It rose by 191.8 points, or 3.1 % to finish at 6421.67 – adding £49bn in value to companies and making it the biggest rise in a day for two years. Yields also finished sharply down, thus reducing the costs of government borrowing significantly.

However, the confirmation that stimulus would continue took the sheen of the attractiveness of Sterling to investors and the pound duly fell against both the dollar and the euro.

Mr Carney has form on these kinds of announcements, famously pledging to freeze rates for a year in 2009 when he headed up the Bank of Canada. With him already bringing ‘forward guidance’ to bear on his new post and with the ECB unusually also adopting the principle, a new certainty about the future of borrowing is sweeping through the markets.

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