Friday, 25 May, 2018

European Central Bank keeps policy unchanged; Draghi seen taking confident tone

European Central Bank leaves interest rate unchanged, despite slowing of EU economic growth ECB's Draghi Warns of Slowdown as Trade Fears Grow
Kenneth Drake | 27 April, 2018, 00:44

Draghi dismissed the slow-down as of little effect to the broader themes of regional growth and convergence with more normal levels of inflation in the medium-term - at or just below the ECB's target of 2.0%.

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

Unpaid loans at large euro zone banks totalled 759 billion euros at the end of September, having fallen from 920 billion euros only a year earlier thanks to strong economic growth and ECB pressure on banks to offload them.

"Following several quarters of higher than expected growth, incoming information since our meeting in early March points towards some moderation while remaining consistent with a solid and broad-based expansion of the euro area economy", he told reporters in Frankfurt.

In our view, the central bank will finish its QE programme by the end of this year and may start to raise key interest rates in 2019 - we will look for signs from the ECB on the timing as the year progresses.

Later in the press conference, Draghi said they have an unchanged confidence about reaching the 2 percent inflation target.

The euro gained as much as 0.4% against the U.S. dollar and traded at $1.2182 at 3:50pm in Frankfurt.


It is possible that the severe weather in recent months might have slightly limited the UK's economic growth, however, particularly with the services sector taking a brief hit. But with the risk of a global trade war still looming, it may not make a decision until absolutely necessary.

Among the EA19, an annual drop in consumer prices was seen only in the Greek Cypriot administration, down 0.4 percent, as the lowest hikes in year-on-year inflation were seen in Greece (0.2 percent) and Ireland (0.5 percent), while the highest rises were seen in Estonia (2.9 percent), Slovakia, and Lithuania (both 2.5 percent).

"Over the coming months we'll see a reduction in bond buying and it's likely that interest rates will remain unchanged until the end of the year as Draghi takes the time to wait and see how growth picks up".

He said it could be that the exceptionally strong growth of past year is returning to a more normal pace and that the bank would have to study incoming data more. A spokesman for the Austrian central bank wasn't immediately available for comment.

The strength of the Euro was not a pressing matter for policy-setters either, and Draghi dismissed the impact of protectionism as so far not material enough to cause concern.

Even if the currency impact were to bite, the European Central Bank has little scope to extend purchases much longer, suggesting it will take an extremely cautious approach to normalising policy, even if it risks erring on the side of caution and moving too late.

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