Euro Trades Mixed as ECB Keeps the Ship Steady

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The European Central Bank’s monetary policy meeting on Thursday saw the key interest rates being left unchanged alongside the central bank’s asset purchases, in a widely expected move. The ECB is expected to maintain its asset purchase program at the current pace of 80 billion until March, following which it will continue purchasing bonds worth 60 billion from April until the end of the year.

The ECB left the main refi rate at zero percent while the deposit rate was left unchanged at -0.40%. The marginal lending facility rate was also unchanged at 0.25%.

Mario Draghi, head of the European Central Bank said on Thursday that policy makers would continue to look through the recent pick up in the annual inflation rate if they are not convinced that it will be sustained.

The ECB president said that “Underlying inflation pressures remain subdued” and that “The governing council will continue to look through changes in inflation if they are judged to be transient and to have no implication for the medium-term outlook for price stability.”

The Eurozone’s annual inflation rate rose 1.1% in December posting a big jump from 0.6% recorded in November. It was the fastest pace of growth in consumer prices in September 2013. Excluding the energy prices, Eurozone’s core inflation rose 0.9% as well, confirming the initial estimates released a few weeks ago. Germany’s inflation rate surged 1.7%.

The December’s inflation reading brought some reassurances to policy makers in the Eurozone as headline inflation edges closer to the ECB’s, two percent target rate. This suggests that policy makers will likely be looking at this year end’s policy meeting on tapering down the QE if inflationary pressures persist. A view that will be welcome by some dissents within the ECB who have been vocal in voicing concerns and backing for winding down the ECB’s bond purchases.

The pickup in inflation last month is seen entirely due to the stabilization of oil prices which has led to an increase in higher energy prices, alongside the winter months which usually see’s increased demand for heating. Therefore, Draghi’s cautious tone on inflation was well timed, subtly hinting that policy makers would prefer to wait for more evidence that inflation was indeed rising than jump the gun prematurely.

[Tweet “Draghi also sets the bar high for inflation target to satisfy policymakers. “]

The ECB also said that it will continue with its bond purchases until the end of December and will not hesitate to expand QE beyond December if policy makers saw the need for it. Draghi also set the bar high for inflation target to satisfy policymakers. “It has to be a durable convergence, it cannot be transient,” he said noting that inflation would need to be self-sustained, “it has to stay there even when the extraordinary monetary policy will not be there,” Draghi said.

European stocks were seen rising into the ECB’s meeting and maintained gains as Draghi said that the central bank would stand ready to expand QE. The euro fell losing 0.19% against the U.S. dollar after the press conference ended and fell briefly below 1.0600 before reversing the losses and managed to close at 1.0663, up 0.3% on the day.

EUR, Daily performance 19/01/2017
EUR, Daily performance 19/01/2017

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