Euro dips after report European Central Bank to cut inflation outlook

Ivan Schwartz
June 19, 2017

The central bank needed "stronger confidence" that price growth will hold at its goal of just below 2 percent.

Inflation on the other hand was now seen lower over that same time horizon, rising by 1.5% in 2017 (instead of 1.7%), 1.3% in 2018 (instead of 1.6%) and by 1.6% in 2019 (instead of 1.7%).

The euro weakened 0.5 percent to trade at $1.1201 as of 4:14 Frankfurt.

The ECB's boss cited factors such as backward-looking wage negotiations and the high proportion of temporary and part-time work as factors which were dampening underlying inflation.

The same pattern was repeated with a spike in April, to 1.9 percent, before a retreat in May.

Regarding inflation forecasts, estimates were cut for the next few years, with Draghi explaining that it was mainly due to oil prices.

European Central Bank President Mario Draghi on Thursday unveiled the bank's latest set of macroeconomic projections that revealed an upgrade to the region's growth outlook and a lowering of the inflation projections. In each case, the forecast rate is a 10th of a percentage point higher than expected in March.

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The ECB's bond-buying programme at a rate of €60bn a month is particularly significant in maintaining monetary stability in view of political volatility in Italy, not to mention an ailing banking system overloaded with non-performing loans and regional banks. The forecast is revised upward as compared to the previous growth forecast.

The bank took a tiny step toward an eventual exit from the stimulus by dropping wording in its statement saying it could lower interest rates even further.

Draghi said at a news conference Thursday that risks to growth are now "broadly balanced". "The ECB's official policy decision signals the ECB's first baby step towards tapering [of its asset purchase programme]".

The currency bloc's economy has been on its best run since the global financial crisis almost a decade ago but the European Central Bank was expected to take a more cautious stance as the inflation rebound has yet to show a convincing upward trend.

Eurostat earlier estimated that the eurozone economy grew by 0.6 per cent in the first quarter of 2017, up from 0.5 per cent in the final quarter of 2016. "We expect the European Central Bank to announce in September, when new forecasts will be available, that tapering will begin in January as deflation risks have vanished".

The ECB raised its growth forecasts for the next three years, noting that the euro zone economy is surfing on a momentum that "increases the chances of stronger than expected economic upswing".

It's a move that many will perceive as yet another sign of the eurozone's strengthening recovery, but Draghi warned that the bank's targets are some way away from being reached and consequently its stimulus policies are likely to continue at current levels for some time, at least into next year.

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