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ECB and Bank of England soothe markets in rate pledge

European Central Bank (ECB) headquarters in Frankfurt on June 6, 2013, 2013. Europe's two most important central banks took unprecedented moves to reassure financial markets that interest rates on their side of the Atlantic are unlikely to rise any time soon.

Europe's two most important central banks took unprecedented moves Thursday to reassure financial markets that interest rates on their side of the Atlantic are unlikely to rise any time soon.

Seeking to calm worries about the political crisis in Portugal and ease concerns that the prolonged period of easy money is coming to an end in the United States, the European Central Bank and the Bank of England separately pledged to keep their borrowing costs low for as long as needed.

The dovish comments triggered a rally in stock prices all around Europe, since it was the first time that either central bank had ever given such forward guidance, a move one analyst called a "mini-revolution".

Speaking after the ECB held its key "refi" rate steady a 0.50 percent for the third month in a row, ECB chief Mario Draghi vowed that "monetary policy will remain accommodative for as long as necessary".

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The guardian of the euro "expects the key ECB interest rates to remain at present or lower levels for an extended period of time," Draghi said.

"Our exit (from low interest rates) is very distant."

In London, too, where the Bank of England also held its interest rate steady at 0.50 percent, the bank's new governor, Canadian Mark Carney, hinted that there would be no rise in borrowing costs in the short term.

Draghi denied any suggestion that the announcements were in any way coordinated, insisting that the ECB's decision was independent from any move by either the BoE or the US Federal Reserve.

Financial markets have been spooked by the announcement last month that the US Fed is preparing to phase out its bond-buying or so-called "quantitative easing" programme, bringing the prolonged period of loose monetary policy to an end.

And the political crisis in Portugal had sparked fears of a new flare-up in the eurozone crisis.

In response, interest rates on sovereigns debt have risen across the euro area and financial conditions have generally tightened, albeit not dramatically.

Draghi insisted that Portugal had made "outstanding" progress in getting its finances and its economy in order and is currently "in safe hands", after the resignation of finance minister Vitor Gaspar.

The results achieved have been "quite significant, remarkable, if not outstanding," Draghi said.

The ECB was "assured by the new minister" Maria Luis Albuquerque, Draghi said.

--- ECB's 'mini revolution' ---

Ever since it was set up 15 years ago, the ECB has insisted that it would never "pre-commit" to future interest rate moves so as to keep financial markets guessing about its monetary policy.

The decision to issue forward guidance therefore constituted a "mini-revolution," said ING DiBa economist Carsten Brezski.

"What was expected to be a rather dull meeting, turned out to be historical. With forward guidance for the first time ever and further rate cuts in sight, the ECB is trying 'whatever-it-takes' to safeguard the fragile recovery of the eurozone," he said.

There has been some debate whether the ECB will actually cut rates further, since that would take one of its key rates, the deposit rate which is currently at zero percent, into negative territory.

Draghi explicitly stated that was a possibility.

"The ECB seems surprisingly open to further rate cuts," said Ernst & Young economist Marie Diron.

"Clearly this communication is aimed at trying to bring bond yields back down after recent moves. But fundamentally, we think that a rate cut would do little to help the economy and could hinder banks' profitability."

ABN Amro economist Nick Kounis was similarly sceptical about whether the ECB really would cut rates further.

"Our central scenario is that policy rates will remain on hold at least until 2015," he said.

But Howard Archer at IHS Global Insight said he saw "every chance that the ECB will eventually take its key policy rate down from 0.50 percent to 0.25 percent as we anticipate that the eurozone will continue to find it very tough to develop clear growth.

"A failure of eurozone bond yields to retreat markedly on a sustained basis from recent higher levels would also likely cause the ECB to take its policy rate down to 0.25 percent," he said.