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ECB holds rates steady. Signals QE exit plans.

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The European Central Bank’s monetary policy meeting was held last week. As widely expected, the central bank left the key interest rates unchanged at last week’s meeting.

The main refinance rate which is at zero percent, the deposit rate which is at -0.40% and the marginal lending rate which is at 0.25% were left unchanged.

However, investors were more concerned about the ECB’s QE plans. The central bank announced that it would plan to exit its QE program by December this year.

The ECB stuck to its base line scenario of ending its 30 billion euro bond purchases until September 2018. Thereafter, the central bank will continue its QE program at a pace of 15 billion euro until December 2018.

The central bank had begun its QE purchases in 2015 starting at a pace of 2.5 trillion euro in bond purchases.

The decision comes despite headwinds that continue to cloud the economic outlook for the Eurozone.

Most recently, the political uncertainty in Italy threatened to derail the ECB’s QE exit plans. As the central bank plans to exit its QE program, there have also been questions about the fact that the central bank was running short of assets to purchase.

In its monetary policy statement, the ECB said that “The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to EUR 15 billion until the end of December 2018 and that net purchases will then end.”

On its forward guidance, the central bank tweaked its language on interest rates. The central bank suggested that interest rates will remain at the current levels at least until the Summer of 2019 and beyond if the economic outlook deteriorated. The central bank said that this was necessary in order to ensure that the gradual evolution of inflation was aligned with the current expectations of a sustained adjustment path.

The markets were anticipating an announcement on the QE plans after the ECB’s chief economist, Peter Praet told news reports just a few days before that the central bank was considering debating on its QE exit plan. However, Praet did not offer much as he said that the decision might not be announced at this week’s meeting.

Still, the market expectations for an ECB’s QE exit plan increased and also increased expectations of a rate hike from the central bank.

The central bank said that policymakers had given considerable review of the progress towards achieving a sustained adjustment on the inflation path. It also said that the officials had also considered the staff economic projections that include measuring price and wage pressures as well as the uncertainty surrounding the inflation outlook.

“Today’s monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2 percent over the medium term,” the bank said in its monetary policy statement.

The ECB noted that it intends to maintain its policy of reinvesting the principal payments from the securities that were maturing for an extending period of time or for as long as necessary to provide for an “ample degree of monetary policy accommodation”

While the ECB has outlined its plans for QE exit and given the time line that interest rates will remain steady until summer of 2019, more questions remain. This comes as the ECB President, Mario Draghi and the chief economist, Peter Praet will be reaching the end of their tenure at the central bank.

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