European Central Bank sticks with economic stimulus

ECB Chairman Mario Draghi has acknowledged that the risks from lower inflation have receded and have removed the easing bias on interest rates.

European equity benchmarks were advancing on Friday morning as oil prices gained traction and after the European Central Bank (ECB) raised its economic growth projections through 2019 and said that it would carry on with its bond purchases at least through December.

"The only change in the statement is that interest rates are now expected "to remain at present levels for an extended period", rather than "at present levels or lower".

Negative rates are meant to encourage banks to lend money to businesses rather than holding it themselves or, as is the case with the deposit facility rate, depositing it with the ECB overnight. "Today's announcements largely met expectations, so recent euro strength will likely hold; however, with euro bullishness having become something of a consensus view in recent weeks, a turn back towards sustained higher inflation is likely required to extend these gains".

The ECB said it now saw inflation this year at just 1.5 per cent, down from a previous forecast of 1.7 per cent and still short of its target of close to 2 per cent.

"Mario Draghi should thus recall that there are no signs of a convincing upward trend in underlying inflation yet", Lemangnen predicted. The asset purchases are expected to end around mid-2018 and the first rate hike is likely in early 2018, added Nordea Bank.

If a rate is negative the bank will pay the ECB (rather than receiving money in interest). Revitalizing other euro zone members' economies would also support the growth of the Estonian economy, Draghi said. It's obvious we'll not see any change in monetary policy today, and the key driver to the Euro will be the risk assessment on the economy.

The euro was trading broadly unchanged against the dollar, not far from a seven-month high of $1.1285 hit earlier this month.

The ECB raised its growth forecasts for the next three years, noting that the euro zone economy is surfing on a momentum that "increases the chances of stronger than expected economic upswing".

However, hours before the European Central Bank meeting, EU statistics agency Eurostat reported the eurozone economy had grown by 0.6% in the first quarter, its fastest quarterly expansion since 2015.

The emphasis the European Central Bank puts on its role implies that it believes growth isn't yet strong enough for it to start dialing back on the bond-buying stimulus program it has been running since March 2015. The priority for these countries is "to resuscitate" growth he said. The region's economy is now projected to grow by 1.9% this year, versus the prior estimate of 1.8%.

The next major test will come in September, when the bank will probably decide whether to continue bond buys beyond this year or start to wind them down, known as tapering.

  • Zachary Reyes