The European Central Bank’s monetary policy meeting concluded yesterday as the euro bulls pushed the EURUSD to nearly a two-year high. At the monetary policy meeting, the ECB left the interest rates unchanged as well as the bond purchase program.
The central bank is seen purchasing bonds at the pace of 60 billion euros currently.
The central bank said that the monetary policy will continue to run its course until December 2017 or beyond if necessary. The common currency surged nearly 1% by the end of the day after initially dipping to session lows of $1.1479. Closing at highs of 1.1658, the EURUSD posted one of the biggest single day gains since June 27.
The ECB also maintained its forward guidance and focused that the central bank was willing to do more if the economic conditions deteriorated. The ECB’s statement showed that the central bank would stand ready to increase its asset purchases in size and duration if need be.
The gains in the common currency came as investors expected the ECB chief to give more clarity on the QE tapering plans. However, despite the carefully chosen words by Draghi, investors pushed the EURUSD higher on the day.
Expectations are rife that the central bank will possibly announce another cut to its bond purchases when it meets in September, subject to the prevailing economic conditions.
Draghi on Inflation
On inflation, the ECB chief said that while the current trends in the economy showed some confidence that inflation in the euro area will pick up, it was yet to be convincing.
Draghi said that headline inflation was dampened by the weakness in the energy prices noting that the underlying inflation continued to remain subdued.
“Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term,” Draghi said.
Inflation in the eurozone was registered at 1.3% on the headline and 1.1% on the core for the month of June. This was a slightly mixed data as inflation was seen falling from 1.9% just two months before. However, the core inflation rate showed a pickup, rising from 0.9% to 1.1% last month.
Draghi on ECB’s QE tapering plans
Speaking on the potential changes to the tapering of the QE program, at the press conference, Mario Draghi said “We need to be persistent and patient because we aren’t there yet.”
Draghi also reiterated that the ECB’s governing council was unanimous in communicating no changes to the forward guidance as well as not setting any precise date to discuss the future of QE tapering.
While Draghi was pressed by reporters during the Q&A session, he said that the ECB did not take any decision on what it would do in September. However, the ECB Chief conceded that a discussion will take place in autumn in regards to the tapering of the bond purchases. However, he reiterated that there was no specific date on this.
Despite the hawkish expectations, some economists believe that the ECB could begin its tapering process around early January. This would be in line with the ECB’s stance that the current pace of asset purchases will continue until December 2017.
As far as interest rates are concerned, this is likely to happen only after a complete withdrawal of the stimulus program.
The ECB was seen to be broadly positive on the growth trajectory in the eurozone. However, some weak spots remain. This includes the labor market and of course the pace of increase in inflation. Draghi said that there were still risks to the euro area growth outlook but that the risks were broadly balanced.