ECB says rates to stay low for 'extended period'

The European Central Bank (ECB) president, Mario Draghi, has said that rates will remain at current or lower levels for an "extended period".

"Monetary policy will remain accommodative for as long as necessary," he told a news conference.

This represents the first time that the ECB has given an indication of its future guidance on the rate of interest in the eurozone.

The ECB left interest rates at the historic low level of 0.5% on Thursday.

The decision not to cut rates further comes amidst a backdrop of political crisis in Portugal after two key ministers resigned.

Earlier this week, Finance Minister Vitor Gaspar, who has overseen unpopular austerity measures in the country for the past two years, handed in his resignation.

That was followed by the foreign minister and junior coalition leader, Paulo Portas.

Bond yields in the country rose above 8% on Wednesday as Prime Minister Pedro Passos Coelho tried to stabilise his coalition.

Asked if there had been too much austerity in Portugal, Mr Draghi said that he thought the country had achieved "very remarkable results".

"It has been a painful route and the results have been quite significant, remarkable, if not outstanding.

"We are reassured by the new (finance) minister, by everything we know about her, so from this point of view, Portugal is in safe hands."

Euro falls

Speaking at a news conference following the ECB's interest rate announcement, Mr Draghi would not be drawn on how long he expected rates to remain low, only that the decision was "unanimous".

"It's not six months, it's not 12 months - it's an extended period of time," he said.

On his reasons for revealing the ECB's plan to keep rates low, Mr Draghi said: "We have an outlook of inflation in the medium term, such that it would justify this new way of communication our forward guidance - a downward bias in interest rates."

Kathleen Brooks, research director at Forex said: "Forward guidance is the future of monetary policy this side of the Atlantic, and with growth rates in the eurozone still so weak, we could see accommodative policy for some time.

"The details surrounding the ECB's forward guidance policy are still cloudy, which could add to market uncertainty and weigh on the euro in the coming days."

Mr Draghi also said that extensive discussions had taken place about a possible interest rate cut this month.

The euro fell sharply on the news that interest rates could be cut further, with the currency falling 0.8% against the dollar to $1.2903.

"The risks surrounding the economic outlook for the euro area continue to be to the downside," said Mr Draghi.

Along with Portugal, several European countries are still failing to deliver economic growth, including France, Spain, Italy and Greece.

The eurozone as a whole remains in its longest recession since it was created in 1999, and is expected to contract further this year.

Following the ECB announcement, the International Monetary Fund warned that Italy, the eurozone's third-largest economy, will shrink by 1.8% this year - worse than the 1.5% contraction it had previously forecast.

It said the government of Prime Minister Enrico Letta must accelerate current economic reforms, and said unemployment was "unacceptably high".