European Central Bank hints at end to easy money policy

Andrew Cummings
June 23, 2017

The European Central Bank (ECB) made a decision to keep interest rates unchanged.

The ECB left its aggressive stimulus unchanged on Thursday, including its 2.3 trillion euro ($2.6 trillion) bond-buying programme and sub-zero interest rates, despite resistance from cash-rich Germany. The central bank also left unchanged its €60 billion ($67.5 billion) per month asset purchase program and kept its promise to run the accommodation "until the end of December 2017, or beyond, if necessary". But Draghi wanted to reassure that "the European Central Bank will be on the market for a long period", reinvesting the bonds it has already bought which will mature gradually and it is ready to increase the size and duration of purchases if that will be necessary.

Mr Draghi's downbeat tone on wage growth and inflation bled into his commentary on the Governing Council's view that it no longer expects it might have to cut interest rates.

Meanwhile, the by-products of this ultra-loose monetary policy have become clear.

But they expect the European Central Bank to go a little further and remove "some of the symmetry" from the forward guidance Draghi provides in his opening statement.

In the Asian session, at GMT0300, the pair is trading at 1.1195, with the Euro trading marginally lower against the United States dollars from yesterday's close. Draft projections show consumer-price growth will be cut to roughly around 1.5 percent each year in 2017, 2018 and 2019, according to euro-area officials familiar with the matter.

It also increased its growth projection for 2018 to 1.8% from 1.7%, and for 2019 to 1.7% from 1.6%.

The meeting of the ECB's governing council was dedicated above all to slight corrections to their communication, explaining that the risks for growth are now "broadly balanced" and no longer tilted to the downside.

The whole premise that the ECB is to raise rates and end its programme of money-printing relies on the assumption that the Eurozone inflation is rising in a sustainable manner towards the Bank's 2% target. Additional event risks include today's general election in the United Kingdom as well as testimony today by former FBI Director James Comey before the US Senate Intelligence Committee regarding Russia's alleged involvement with the US election.

Analyst Carsten Brzeski at ING-DiBa described the bank's statement as "a very first baby step toward tapering" the stimulus effort. The outlook for next year was raised to 1.8 percent from 1.7 percent.

"Even though it was well telegraphed over the last 24 hours, the future expectations on inflation came in a bit lower than the market had been anticipating", said Dean Popplewell, chief currency strategist at Oanda in Toronto.

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