ECB leaves monetary policy unchanged and updates economic forecasts

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The European Central Bank concluded its final monetary policy meeting last week. As widely expected, following the tapering decision at the October meeting, the markets were expecting to see the ECB hold the line.

The central bank left the key interest rates and the repo rates unchanged at the December meeting. As previously announced, the new tapering at a rate of 30 billion euro is expected to kick in from January 2018 and is expected to run the course until September next year.

“The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases,” the central bank’s statement said.

The ECB also maintained that it was ready to do more if the outlook turned less favorable or if the financial conditions were inconsistent as it could be detrimental to the progress. The central bank’s statement did not give out any major surprises which saw a muted reaction in the markets as a result.

 

ECB long term inflation forecasts still below inflation target

 

The ECB also gave its economic forecasts last week. As widely expected, the central bank raised its economic forecasts underlining the strong momentum in growth in the Eurozone.

However, there were clearly some disappointments as far as inflation was concerned. As part of its long term forecasts, the ECB projected that inflation in the eurozone would average 1.7% by 2020. This was still below the central bank’s 2% inflation target rate.

The central bank said that inflation forecast for 2017 was at 1.5%, which was unchanged. It said that inflation in 2018 would be around 1.4%, up from previous estimates of 1.2%, while it expects inflation to average around 1.5% before rising to 1.7% by 2020.

Latest inflation report for November confirmed that the Eurozone’s headline inflation rate was at 1.5% while the core inflation rate was confirmed at 0.9%. Consumer prices in the Eurozone were seen briefly falling before stabilizing near the current levels.

The ECB had previously indicated that consumer prices in the Eurozone could fall towards the end of the year and early next year. The declines were attributed to a statistical glitch.

Draghi however said that the central bank was confident that inflation would reach its target of 2% despite being lower.

Growth forecasts were understandably raised higher as the ECB projects growth to average around 2.4%. This was higher than the 2.2% forecast previously. The growth outlook for 2018 was revised higher to 2.3%. This was up from the 1.8% growth forecast that the central bank gave previously. By 2020, the central bank expects Eurozone growth to average 1.7%.

Calling the projections as positive, Draghi said that the “risks surrounding the euro area growth outlook remain broadly balanced.” The ECB president sounded optimistic noting that the cyclical momentum with positive development in the sentiment indicators could lead to further positive surprises.

Among the risks, the central bank chief noted that the risks came mostly from global factors and the developments in the foreign exchange markets. Draghi also said that the threats of deflation had diminished over time.

The central bank chief also brushed aside concerns from the Fed tightening. He said that output gap would close next year and that there were no systemic risks to the financial stability in the euro area.

The markets were a bit disappointed to see that the inflation forecasts from the central bank still showed that the inflation target would not be reached by 2020. Following the central bank meeting and the forecasts, the euro was seen falling to an intraday low of 1.1770.

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