ECB holds rates

Comment on this story
ECB Reuters. The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt.

Brussels - The European Central Bank left interest rates unchanged on Thursday, waiting for updated forecasts from its staff in June before deciding whether to take fresh action to counter low inflation that ticked up last month.

The decision was widely expected and markets' attention will now shift to ECB President Mario Draghi's 14:30 SA time news conference, when investors will be listening for any indication the bank could act next month.

Last month, Draghi said the Governing Council was “unanimous in its commitment to using also unconventional instruments” to cope with risks of a “too prolonged period of low inflation.”

Data have since shown euro zone inflation ticked up to 0.7 percent in April from March's 0.5 percent, relieving pressure on the ECB to act this month. But a downward revision in the staff inflation forecasts in June could trigger action next month.

“The markets will be on alert to the level of openness to any policy action in June,” Nomura economist Nick Matthews said of Draghi's news conference.

“We're expecting President Draghi to express as dovish a stance as possible,” added Matthews, who expects the ECB to cut both its main refinancing rate and the deposit rate by 10 basis points in June.

A Reuters poll published on Friday showed euro zone monetary policy is likely to remain steady well into the future as a more broad-based recovery takes hold while inflation has probably already fallen as low as it will go.

The ECB Governing Council met in Brussels against the backdrop of a Franco-German spat over ECB policy towards the euro's exchange rate - one factor Draghi has identified as a potential trigger for policy action.

Germany said on Monday the level of the euro was an issue for the ECB but not politicians, indirectly criticising France's prime minister after he said the currency was “too high” and a “more appropriate” monetary policy was needed to bring it down.

The euro has gained over 4 percent in the past six months and rose against the dollar on Thursday.

While the ECB is expected to reiterate its concern about the impact the strong currency has on already-low inflation, data pointing to a firmer recovery and improved financing conditions has eased the pressure to act now.

A Reuters poll of more than 60 foreign exchange strategists said the euro would need to reach $1.42 to spur policy action. It was at $1.39 on Wednesday.

 

QE “SOME WAY OFF”

The June meeting is shaping up as a crunch date for a potential policy shift.

Many economists expect a downward revision in the ECB staff's inflation forecasts, which could open the way for more stimulus.

Draghi has several policy tools at his disposal, including cutting rates or injecting more liquidity.

But the impact of such measures on the exchange rate and inflation is seen as being limited. For more impact, the ECB would need to turn on its money printing press, which is more a complicated option and is not expected to happen any time soon.

Draghi said in April that if the inflation outlook were to deteriorate, the ECB could respond with a “broad-based asset purchase programme”, probably quantitative easing (QE) - effectively printing money to buy assets.

Last week, however, he told German lawmakers at a closed-door event that while low inflation would persist in the euro zone, he did not expect deflation, a source who attended the meeting said, adding that Draghi “made clear that we're still some way off QE”.

The economy is showing increasing signs of stabilisation.

Demand for home and corporate loans is expected to pick up, an ECB survey showed, while polls of euro zone business indicated on Tuesday they had a solid start to the second quarter.

Forty of 52 economists in a Reuters poll said euro zone inflation will not revisit the 0.5 percent level seen in March or go any lower in the near future. - Reuters



sign up
 
 

Comment Guidelines



  1. Please read our comment guidelines.
  2. Login and register, if you haven’ t already.
  3. Write your comment in the block below and click (Post As)
  4. Has a comment offended you? Hover your mouse over the comment and wait until a small triangle appears on the right-hand side. Click triangle () and select "Flag as inappropriate". Our moderators will take action if need be.