The European Central Bank (ECB) announced today that it has made no change to interest rates or its bond buying stimulus programme. Markets then turned to watch Mario Draghi’s press conference carefully for any hints of changes to policy in the coming months.
Despite economic growth for the Eurozone, inflation remains below the target level set by the ECB, posting at 1.5% for August, lower than the “close to, but below 2%” target. This slower inflation is likely to be the reason that the ECB has yet to make a decision on whether to start winding up its quantitative easing measures.
In the press conference, Draghi announced that the medium term outlook for the Eurozone economy remains broadly unchanged, but they have raised their 2017 Gross Domestic Product (GDP) forecast to 2.2% - this is the fastest figure for ten years. At the same time, they cut their inflation forecast for 2018 and 2019. Draghi, appearing cautious regarding inflation, also said he expected core inflation to increase gradually over the medium term, although headline inflation could turn negative by the end of 2017. Investors may see this as an indication of no further tight.
He stated that ECB measures support borrowing conditions “significantly”. Despite the economic recovery for the Eurozone, he emphasised that the bloc still requires a “very substantial degree of monetary support”, and, from a policymaker and political perspective, that “structural reforms must be stepped up substantially.” Draghi maintained that domestic cost pressures in the labour market are subdued.
He made it clear that the ECB is keeping a very close eye on the volatile Euro, as “a source of uncertainty”.
In response to the announcements, the Euro has bounced up to $1.20 and is around £1.08.
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