European stocks rise as Draghi surprises market

President of European Central Bank Mario Draghi on his way to a news conference in Frankfurt, Germany, this week. Photo / AP

European stocks climbed as both the European Central Bank and the Bank of England reassured investors that interest rates will remain low to help their respective economies.

"The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time," ECB President Mario Draghi said at a press conference in Frankfurt.

Europe's benchmark Stoxx 600 Index finished the session with a 2.3 per cent increase from the previous close. Germany's DAX gained 2.1 per cent, while France's CAC 40 added 2.9 per cent.

Bonds gained too. Yields on Germany's two-year note yield dropped as low as 0.08 per cent, while yields on Spain's 10-year bond declined 12 basis points to 4.65 per cent.

"Draghi surprised the market," Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich, told Bloomberg News. "The key sentence that rates would remain low for an extended period of time has to some extent revived rate-cut expectations, and at the very least, wiped out fears of a removal of stimulus. Markets are rewarding that with price gains."

As was widely expected, the ECB kept its key rate at a record low 0.5 per cent at a meeting today.

"The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi warned. "The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include the possibility of weaker-than-expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries."

The euro slid against the US dollar, declining 0.6 per cent.

The UK's FTSE 100 jumped 3.1 per cent after the Bank of England kept its benchmark rate steady at a record low as well and suggested it is there to stay.

"The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy," the BOE said in a statement.

The British pound weakened as a result, sliding 1.4 per cent against the greenback.

"The [BOE] statement is probably a little bit more dovish than the market was expecting, pushing back on the rise in longer-term interest rates and suggesting that monetary policy will remain accommodative for some considerable time," Paul Robson, a senior currency strategist at Royal Bank of Scotland Group in London, told Bloomberg News. "This leaves sterling vulnerable against the [US] dollar and the euro."

US markets were closed for Independence Day.

Investors will scrutinise Friday's US government employment report for potential insight into the timing of any paring back of the Federal Reserve's bond-buying program. Nonfarm payrolls are forecast to have increased 165,000 in June, according to a Reuters poll of economists, while the unemployment rate will fall to 7.5 per cent.