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The European Central Bank in its first monetary policy meeting of 2017 on Thursday maintained interest rates and its bond-buying program unchanged, as expected. Also, the European Central President Mario Draghi concluded that the ECB is unconvinced by the recently-higher inflation data, and that no further withdrawal of stimulus is being contemplated yet.
The ECB maintained that plans to scale back asset purchases between April-December, 2017 did not constitute tapering and this wasn’t discussed at yesterday’s rate review. Instead, the shift was an effort to recalibrate policy in light of receding deflationary risks.
On the economy, the central bank maintained its dovish stance despite an improving growth and inflation outlook. The recent firming up of inflation prints (December’s 1.1 percent y/y vs November’s 0.6 percent) was put to large base effects from energy prices, while the underlying momentum remained weak. Higher nominal wage growth and reversal in excess capacity are seen as necessary to move towards the 2 percent inflation target, reported DBS Group Research.
Moreover, President Mario Draghi stressed that easing financing conditions and better credit growth were primarily due to the central’s easy policy stance. Downside risks to growth were also flagged from global factors, while household incomes benefit from an accommodative policy and improving labour market growth. In all, the ECB emphasised the need for patience on the policy front and will remain on guard to contain expectations for a premature end to the asset purchases, they added.
Post this decision, the EUR/USD drop to a 3-day low of around 1.0600.
