European Central Bank drops the reference to lower rates in its forward guidance

Xavier Trudeau
Juin 22, 2017

The bank also retained its asset purchases of Euro 60 billion a month till December 2017. The trade deficit widened to Euro 5.5 billion in April from Euro 4.8 billion in the previous month.

Bond-buying and low interest rates were introduced at a time when the European Central Bank feared deflation - or steadily decreasing prices that undermine economic activity.

Draghi now sees "balanced risks" instead of "downside risks".

BOJ Deputy Governor Kikuo Iwata said earlier Thursday it would be tough for the central bank to release the scenarios on how it would withdraw its stimulus in the future. But on inflation - the ECB's primary mandate - he insisted that nothing substantial has changed.

Patrick O'Donnell at Aberdeen Asset Management said the easing bias removal was not a great surprise. The ECB chief also said that the bank was ready to lower rates if risks reappeared.

Of the decision to drop a reference to rate cuts he said: "We didn't have a vote but I didn't hear any dissenting voice by any governing council member".

"We need to be persistent, we need to accompany the recovery with our monetary policy". However, he tempered this view with a downward revision of the bank's inflation projections, based on its view that struggling oil prices will continue to weigh on inflation levels.

The ECB has predicted a growth across the eurozone of 1.9% - up from the predicted 1.8% which was forecast in March.

In midday trading, US 10-year Treasuries were last down 5/32 in price, with yields at 2.198 percent, compared with 2.180 percent late on Wednesday.

"Headlines suggesting that the European Central Bank will revise its inflation forecast lower through 2019 suggests that the hawks will struggle to make the case for an early normalization of the ECB's policy settings", says Shaun Osborne at Scotiabank.

"Measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation", Draghi said.

By pumping cash through the financial system and into the real economy, the bank believes it has stimulated growth and pushed inflation back towards its target of just below 2.0 percent.

The change could lift 2017 growth to 2 percent, Draghi said, higher than the official forecast presented at the start of the press conference for 1.9 percent expansion this year.

USA 30-year bonds fell 9/32 in price, yielding 2.851 percent, compared with Wednesday's 2.837 percent. At 9:18 AM ET (13:18 GMT), EUR/USD traded at 1.1214, compared to 1.1228 prior to the speech, while EUR/GBP was at 0.8684 from 0.8678 earlier.

European Central Bank president Mario Draghi indicated that while there were still "downside risks" to the eurozone economy due primarily to global factors, the monetary authority now considers "risks to the growth outlook are now broadly balanced".

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.

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