The European Central Bank left monetary policy on hold at the first meeting of its Governing Council in 2017 on Thursday, with President Mario Draghi striking a dovish tone on future inflation in the process.
The bank announced that all of its key interest rates, as well as the scale of its quantitative easing programme, remained unchanged after the conclusion of the meeting.
That means the ECB’s base interest rate stays at 0%, while its deposit rate is -0.4%.
Its current quantitative easing programme is set at €80 billion per month and is scheduled to be extended until December, but at a decreased rate of €60 billion from March. That decision was announced at the final meeting of 2016 in December.
“The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases,” the ECB said in a statement released alongside the decision.
This was expected, and had the ECB made any tweaks to those policies this month, it would have provided a significant shock for the markets.
The ECB’s statement reiterated that it is willing to extend QE beyond its current horizon, saying: “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.”
Speaking to reporters following the decisions, Draghi made clear that the ECB believes underlying inflationary pressures remain weak. Here is a key extract from Draghi’s prepared opening remarks (emphasis ours):
“As expected, headline inflation has increased lately, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued. The Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.
“There are no signs yet of a convincing upward trend in underlying inflation. Looking ahead, on the basis of current oil futures prices, headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change of energy prices. However, measures of underlying inflation are expected to rise more gradually over the medium term.”
To bring inflation back to the ECB’s target of close to, but below 2% “a very substantial degree of monetary accommodation is needed for euro area inflation pressures to build up and support headline inflation in the medium term.”
Commenting on consistent criticisms from Germany about the bank’s persistently low interest rates, Draghi was resolute, saying: “Low rates are necessary now to get higher rates in the future… The recovery of all of the Eurozone is the interests of everyone, including Germany.”
Questioned about the possible impacts of both Brexit and Donald Trump’s presidency on the eurozone economy and ECB policy, Draghi said it was “too early to comment,” on either.
The euro barely flinched immediately after the decision was announced, remaining around 0.3% higher against the dollar at $1.0663. However, following Draghi’s comments the single currency lost ground, and around 2.10 p.m. GMT is trading at $1.0600, a fall of 0.28% from the day’s open.
Here’s the chart:
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