Monetary Policy March 2018

ECB removes easing bias, moving closer to monetary policy normalization

At its monetary policy meeting held on 8 March, the European Central Bank (ECB) removed its easing bias by omitting in its statement a reference to the possibility of bigger bond purchases, which currently stand at EUR 30 billion per month. The ECB stated that the asset purchases program would continue until September or beyond, if necessary, but made no mention of enlarging the program, as it had in January’s meeting. It decided to keep interest rates unchanged, a decision widely expected by market analysts. The main refinancing rate remains at 0.00%, and the marginal lending rate and deposit facility rate at 0.25% and minus 0.40%, respectively.

The slight change in the ECB’s stance comes on the back of the sustained pace of recovery in the Eurozone. Economic sentiment remained high at the beginning of 2018, and PMI manufacturing readings continued to signal robust expansionary conditions in the first two months of the year. However, inflation in the Eurozone remains well below the Bank’s target of “close to, but below, 2.0%”. Inflation declined for the third consecutive month in February, also dampened by a strong euro.

The data pushed the ECB to look for a compromise solution, in which the prolongation of an accommodative stance is reconciled with the need to gradually retire the stimulus plan. Developments in the foreign exchange market could again interfere with the Bank meeting its inflation target, partially counteracting the effects of solid growth within the common-currency bloc on inflation.

Looking forward, the majority of our analysts expect rates to stay unchanged this year, in line with the ECB’s statement that interest rates will remain at their current levels “for an extended period of time and well past the horizon of our net asset purchases”.

Eurozone Interest Rate Forecast

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