Euro Area Monetary Policy

ECB holds rates as new projections downplay deflation risk

At its 6 March meeting, the European Central Bank (ECB) kept the refinancing rate unchanged at the record low of 0.25% as the market had expected. The decision comes amid a broadly-unchanged, although slightly more optimistic, outlook for the Euro area economy. Following three consecutive quarterly expansions in 2013, “survey-based confidence indicators up to February are consistent with continued moderate growth also in the first quarter of this year,” according to the ECB. In the months ahead, “the ongoing recovery is expected to proceed, albeit at a slow pace.” The improvement in the current conditions of the Euro area economy were partially reflected in the most recent ECB projections. The ECB upgraded its GDP forecast for 2014 and now sees the economy expanding 1.2% (December projection: +1.1%). For 2015, the ECB expects the economy to expand 1.5%, which is unchanged compared to its December projections. For the first time, the ECB published forecasts for two-years out; for 2016, the ECB expects the economy to expand 1.8%. Risks to the outlook remain on the downside and are related to, “developments in global financial markets and in emerging market economies, as well as geopolitical risks.” Regarding the outlook for price developments, the Bank believes that, “on the basis of current information and prevailing futures prices for energy,” inflation will remain around the current low levels over the course of the coming months and then gradually get closer to the 2.0% target in the medium to long term. The ECB does not foresee persistently-low inflation nor a deflationary scenario in the coming years. This was reflected in the lower inflation projection for this year; the ECB currently expects inflation to average 1.0% in 2014 (December projection: 1.4%). Inflation will pick up in 2015 (1.3%) and in 2016 (1.5%). That said, the Bank maintains the view that risks to the inflation outlook are broadly in balance. In the statement accompanying the ECB's decision, President Mario Draghi reiterated the forward guidance adopted in the previous meeting, stating that the refinancing rate will remain, “at present or lower levels for an extended period of time.” Taking this setting into account, FocusEconomics panelists expect the policy rate to end 2014 at 0.48% and 2015 at 0.60%.

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