European Central Bank president Mario Draghi knows all about the power of words, but yesterday his comments came under particular scrutiny from market-watchers.

The decision to leave interest rates unchanged at 0.5 per cent was largely expected. On everybody’s mind was whether the ECB president would give any further specificities as regards forward guidance.

In July, the normally conservative ECB took observers by surprise when Draghi said the board “expects the key ECB interest rates to remain at present or lower levels for an extended period of time”, a wording that was repeated yesterday. The indication of forward strategy was unprecedented for the bank, which has always refused to comment on future interest rate decisions.

Change in tack
The change in tack was seen as an attempt by Draghi to combat the rising money market rates, which have crept up over the summer, in part reflecting expectations of a tapering-off of the US Federal Reserve's bond-buying programme, but also suggesting the market is pricing in a possible ECB interest rate hike.

Yesterday Draghi indicated that the bank was ready to intervene, by cutting interest rates if necessary, to help bring money markets down.

The ECB finds itself in a tricky position. While recent economic data has suggested that the European economy is slowing turning a corner, the bank is keen not to paint an overly optimistic picture of the economic outlook, which might indirectly contribute to an “unwarranted” increase in market interest rates.

Yesterday’s update on economic outlook was an attempt to achieve this balancing act, as – in some would say typically equivocal fashion – the ECB improved its outlook for this year, but revised its outlook for 2014 downwards by 0.1 percentage point.

Turning a corner
Yesterday's governing council meeting took place against a backdrop of data suggesting Europe may be turning a corner. The EU statistics agency confirmed this week that the euro zone emerged from recession in the second quarter of this year, following 18 months of stagnancy, while purchasing managers' index figures this week suggested an improvement in manufacturing.

Draghi highlighted the 0.3 per cent quarter-on-quarter increase in GDP in the second quarter, pointing out that it “confirmed the expected gradual improvement in economic activity from low levels”. In other words, recent economic figures suggest that the ECB’s prediction of a gradual recovery at the end of this year has been proved right.

But Draghi was careful to highlight “downside risks” to recovery, such as a rise in commodity prices arising from geopolitical difficulties. He also sounded a note of caution on the prospect of euro zone recovery. “I am very, very cautious about the recovery, I can’t share the enthusiasm,” he said, noting that the shoots were still “very, very green”.

The dovish tones struck by Draghi were in tune with what many have been led to expect from the ECB. For market-watchers, the real action will be at the Federal Reserve’s meeting of the board of governors on September 17th and 18th, as investors watch for signs of a slowing-down of asset purchases by the US.