European Central Bank Leaves Interest Rates Unchanged

Ivan Schwartz
April 27, 2018

"The Governing Council expects the key European Central Bank interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases", said a policy statement from the European Central Bank. While acknowledging that momentum softened at the start of the year, he reaffirmed his confidence in the durability of the euro-area expansion.

Alternatively assuming the European Central Bank dismisses the current slowdown in growth as transitory ING's Patel "favours modest euro upside going into the meeting".

Analysts at TD Securities meanwhile say their base-case scenario for the meeting is for Draghi to largely dismiss the current slowdown in growth as temporary and to focus on a more positive medium-term outlook, in which the forecast for inflation would, most significantly, remain unchanged.

"The interesting thing is that we didn't discuss monetary policy per se", he said.

Economists polled by Reuters ahead of the meeting expected bond purchases to end this year after a short taper and to see the first rate increase in the second quarter of 2019.

With the euro falling, the dollar traded near a 3-1/2-month high against a basket of currencies, bolstered by the 10-year Treasury benchmark yield breaching the three percent threshold for the first time in four years.

However, market participants and observers had at least expected that ECB president Draghi would hint at possible decisions in months ahead, as so far the central bank only chose to purchase bonds worth Euro 30 billion per month till September, noted Commerzbank in a research report. Inflation is already set to miss the target, the central bank's sole policy objective, for years to come.

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This leaves the door open to ending lavish bond purchases by the close of the year.

Policy makers had already signaled that they expected growth to stabilize at a solid pace.

Equities enjoyed strong gains in South Korea, where electronics conglomerate and key tech bellwether Samsung posted record quarterly profits, while Japan's Nikkei added 0.5 percent. The EUR/GBP exchange rate has moved from a weekly high of 0.8775 to 0.8732, (GBP/EUR up from 1.1396 to 1.1452) while the EUR/USD rate has slid from a weekly high of 1.2270 to 1.2168 today.

Having tweaked its guidance last month to reflect solid growth, Draghi argued that the economy remained strong, although he acknowledged evidence of a "pull-back" from exceptional growth readings seen around the turn of the year.

"While this shouldn't be anything to worry about, it's certainly not the right time for a change in monetary policy given benign inflation and relatively weak wage growth".

Lower interest rates and QE are created to pump cash through the financial system and into lending to firms and households - powering economic growth and inflation. In Germany, public-sector employees signed a pay deal that should eventually boost inflation, following a similar deal for factory workers.

Oil's 11 percent rise this year, on top of last year's 18 percent jump, is adding to inflation fears. Even if the single currency's rise has petered out for now, exporters like Continental AG and Volkswagen AG flagged the exchange rate as a risk.

Other reports by GizPress

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