European Central Bank hints at end to ultra-easy monetary policy

The European Central Bank announced its decision today to hold monetary policy unchanged at the end of its two-day meeting in Tallinn, Estonia.

"The fact that it no longer expects interest rates to remain at present "or lower" levels is a clear deliberate signal that policy makers are gradually becoming more hawkish", said London-based Craig Erlam, senior market analyst, at OANDA.

The main refi rate was held at a record low zero percent and the deposit rate at -0.40 percent.

The negative interest rates of the European Central Bank are squeezing margins for fixed-income sectors, such as pension funds, not to mention traditional retail banking that depends on saving accounts.

That means it will continue to buy government bonds and other assets worth 60 billion euros ($65 billion) a month.

Euro may find technical support at 1.116, the low from May 31, with additional support likely ahead of 1.110, where around €8.7 billion ($9.73 billion) of option expiries roll off Friday.

The ECB Governing Council delivered an important tweak to its forward guidance on rates. Indeed, Draghi said risks to the growth outlook are now "broadly balanced", in contrast to the previous description of those risks as tilted to the downside.

Volatile food and energy prices are to blame for such rapid changes, policymakers say, while "core", or underlying inflation discounting those elements remains sluggish.

Responding to questions from reporters during his post-decision press conference, Draghi said the bank shed its easing bias as the deflation risk has totally disappeared.

Tensions within the governing council have pitched so-called hawks led by the German members, who want to end emergency measures sooner, against doves nervous of pulling supports before growth is fully sustainable. An expectation, said Mr Draghi, is not the same as a promise.

"We need to be patient", Draghi said. The real discussion on changes to monetary policy has been postponed.

After all, the European Central Bank has an inflation target of near but just below 2%. Officials now see inflation at 1.6 percent in 2019, down from a March projection for 1.7 percent. For 2018 and 2019, growth is forecast at 1.8% and 1.7% respectively.

Eurostat said the 19-country euro zone expanded by 0.6% quarter-on-quarter and by 1.9% year-on-year. Mario Draghi stated that tapering was not talked about during the meeting and continued to tie the future monetary policy steps closely to the inflation outlook. The ECB cut the estimate for consumer price inflation (CPI) for 2017 to 1.5% from 1.7% previously.

Saxo Bank's John Hardy told CNBC ahead of the announcement that he believed any immediate dip in the euro during Thursday's meeting would be short-lived, but added that the leak may have been used to prevent a euro rally.

  • Zachary Reyes