ECB keeps policy rates and QE program unchanged, future steps likely to be very gradual

As anticipated, the European Central Bank Governing Council changed its communication during its meeting earlier today. It removed the possibility for lower rates and saw risks to economic outlook as balanced and not biased to the downside anymore, noted Nordea Bank.

However, the general tone of the press conference was dovish. Mario Draghi stated that tapering was not talked about during the meeting and continued to tie the future monetary policy steps closely to the inflation outlook. He reiterated that low inflation needs loose monetary policy.

The future steps to alter ECB’s monetary policy are expected to be gradual, said Nordea Bank. If the underlying trend in core inflation stays flat, there is possibility that the Governing Council will make decisions about the future of asset purchase program in October. The asset purchases are expected to end around mid-2018 and the first rate hike is likely in early 2018, added Nordea Bank.

“We also think the EUR/USD has gotten a bit ahead of itself and see downside for the currency pair going forward”, stated Nordea Bank.

Meanwhile, recent economic developments in the currency bloc have been upbeat. The quarterly GDP growth for the first quarter of 2017 was upwardly revised to 0.6 percent, while the most recent confidence indicators point towards strong growth in the second quarter as well. Therefore, the ECB staff slightly revised up the GDP projections. The economy is now expected to grow 1.9 percent this year and decelerate slight in 2018 and 2019.

On the other hand, the ECB staff revised down headline inflation projections by more than expected. The considerable downward revisions affirm that the future steps to alter the ECB monetary policy would be quite gradual, said Nordea Bank.