European Central Bank won't call time on stimulus just yet

On Thursday, the bank has kept its short-term benchmark rate that steers short-term rates at a record low of zero. The ECB said it now saw inflation this year at just 1.5 percent, down from a previous forecast of 1.7 percent.

Economic growth this year was seen at 1.9 per cent versus an earlier 1.8 per cent forecast. The ECB's annualized projection fell from 1,7% to 1,5%, presumably due to falling energy prices. Meanwhile, China trade growth accelerated last month, with exports expanding 8.7 percent and imports up 11.9 percent, pointing to a pickup in global demand.

The ECB also left its key interest rates unchanged, and said it would keep a huge stimulus program running until the end of the year "or beyond, if necessary". President Mario Draghi and his closest allies had sought to talk down expectations for any major shift, arguing the European Central Bank must be extremely cautious in communicating any exit from stimulus amid a lack of convincing inflationary pressure. The ECB further noted that risks to the growth outlook are broadly balanced.

With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at minus 0.4 percent.

The euro was down 0.31% against the dollar at $1.12 after the announcement.

That would barely rise to 1.6 per cent in 2019, down from an earlier estimate of 1.7 per cent and further away from its official target of at or close to 2 per cent.

Analyst Carsten Brzeski at ING-DiBa described the bank's statement as "a very first baby step toward tapering" the stimulus effort.

The ECB retained its reference to increasing its bond-purchase program in both size and duration should conditions worsen.

But Mr. Draghi also warned inflation would remain weak over the coming years, and said European Central Bank members hadn't discussed winding down their EUR60 billion-a-month bond-purchase program.

The euro zone economy is now expected to expand by 1.9 per cent in 2017, 1.8 per cent in 2018 and 1.7 per cent in 2019, the bank said, raising all three forecasts by 0.1 percentage point. Analysts think the purchases will be tapered next year, but the central bank has moved gingerly in indicating when it might be ready to announce a schedule for reducing and then ending them.

"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.

Mr Draghi stressed that there is no end on the horizon to the ECB's easing programme, which involves buying €60bn-worth of bonds each month to flush more cash into the economy.

That is a particular problem for Germany, which is Europe's savers nation, who are now having to accept negative interest rates, while Finance Minister Wolfgang Schäuble is vehemently opposing expansionary policy.

In short, the European Central Bank left the markets with very little to latch on, and appeared a little more dovish than expected.

  • Zachary Reyes