European Central Bank makes modest change as growth picks up

The council only made a small concession to the improving economy in the 19 countries that use the euro by dropping from its statement wording that it could lower interest rates further.

The ECB kept its rate on bank overnight deposits, which is now its primary interest rate tool, at -0.40%.

The bank kept interest rates and its bond-purchase stimulus program unchanged at a meeting Thursday of its 25-member governing council. That's a change from its previous guidance, which talked about rates at "present levels or lower".

We still expect the European Central Bank to continue its QE programme next year but to reduce its purchases to EUR40bn per month starting from January 2018 and continuing for at least six months.

At a news conference in Estonia's capital city, Tallinn, ECB President Mario Draghi unveiled brighter economic forecasts and signaled the ECB probably wouldn't cut interest rates again, a sign of confidence in the region's recovery. Intesa edged 0.7 percent higher and UniCredit gained 1.2 percent.

The euro retreated against the dollar after the ECB's announcement.

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"Nevertheless, with headline inflation rates rolling over and core inflation still subdued, the central bank does not need to hurry in removing accommodation".

It is completely legitimate to expect that the Fed will raise rates next week and it will be interesting to see what the FOMC will hint about the path forward of the Fed's tightening situation.

The euro hit a one-week low of $1.11995, down around 0.4 per cent on the day, as Draghi spoke. At the same time, the inflation projections were cut more markedly - to 1.5% this year from 1.7%, while the forecasts for 2018 and 2019 are now at 1.3% and 1.6% respectively, down from 1.6% and 1.7% previously. "We expect the European Central Bank to announce in September, when new forecasts will be available, that tapering will begin in January as deflation risks have vanished". Its monthly asset purchases will continue to total €60-billion a month and to run until at least December. A break of $1.1180, which corresponds to the 20-day moving average, which the euro has not closed below since April 17, would be important.

Earlier on Thursday, the Eurostat statistics agency said the eurozone economy had grown at its fastest rate in a year during the January-to-March quarter.

The economy expanded 0.5 percent in the first quarter and the European Central Bank forecasts 1.8 percent growth this year.

"Now we have a new situation that the economy is relatively good, while inflation remains very low", Tödtmann told DW.

Pricing now suggests investors do not anticipate a hike in the ECB's deposit rate over the next year. There had been speculation that the ECB President would start preparing the market about the prospects of tapering its massive QE stimulus programme at this meeting due to the recent improvement in Eurozone data and increased pressure from Germany, where several officials including Chancellor Angela Merkel have recently called for tighter ECB monetary conditions.

The other main issue markets will be focusing on at the meeting is the ECB's forecasts.

The ECB publishes forecasts for key economic matrices such as GDP and Inflation at its meetings.

  • Zachary Reyes