Eurozone: ECB holds monetary policy; strikes less dovish tone
March 9, 2017
The European Central Bank (ECB) decided to hold interest rates, as widely expected, at its 9 March meeting and made no changes to its bond-buying program. The refinancing rate, the marginal lending rate and the deposit facility rate remain at 0.00%, 0.25% and minus 0.40%, respectively.
The ECB’s monetary policy stance remains ultra-accommodative despite a recent rise in price pressures in the common-currency block. Inflation rose to 2.0% in February—rising above the ECB’s target of just under 2.0% for the first time since January 2013—and the ECB raised their inflation projections for this year to 1.7% (previously: 1.3%). However, the Bank decided to keep rates on hold as the rise is largely attributed to an increase in energy prices and measures of underlying inflationary pressures remain low. ECB Mario Draghi stressed in the accompanying press conference that there are “no signs yet of a convincing upward trend in underlying inflation.”
Draghi struck a less dovish tone at the press conference compared to the previous ones, but still emphasized that a substantial degree of accommodation is needed in the medium term. Draghi acknowledged that activity in the Eurozone is firming and that downside risks to the outlook are less pronounced, which has led the ECB to revise up its GDP projections for 2017 and 2018 to see growth of 1.8 and 1.7% respectively (previously: 1.7% and 1.6%). Draghi reiterated his call for governments in the bloc to implement structural reforms and to conduct growth-friendly fiscal policies to support economic activity.
The strength of recent economic data, rising inflationary pressures and the less dovish tone of the ECB have sparked many of our analysts to think that the Bank could announce a tapering of its asset purchase buying program this year. Commenting on their view, Economists at Nomura add:
“Overall, we still think there are strong grounds for believing that the pre-conditions for higher levels of core inflation (and thus of policy normalisation) will be met in the coming months. As President Draghi stressed, the eurozone’s economic recovery is maturing and becoming more broadly-based. […] Barring political shocks, this should pave the way for an even more balanced assessment of the economic outlook at June’s Governing Council meeting. And that, in turn, should pave the way for a tapering of the asset purchase programme to be announced at the September meeting for enactment at the start of next year.”
Along these lines, Carsten Brzeski, Chief Economist at ING comments:
“All in all, the ECB keeps its easing bias but has also started to gradually incorporate some hawkish sounds. This strategy is preparing the grounds for a tapering announcement after the Dutch and French elections if growth and inflation follow their current paths, but keeps all options open if the current optimism turns out to be unjustified.”