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Draghi Rules Out Rate Hike This Year; All Options Open For ECB Asset Purchases

EconomyJan 25, 2018 09:36AM ET
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© Reuters. Draghi rules out rate hike this year, says all options open for asset purchases – After the European Central Bank (ECB) announced its widely anticipated decision to hold interest rates steady and made no changes to the outlook for its monthly asset purchases (APP), ECB president Mario Draghi kept all his monetary policy cards on the table with regard to the future of the asset purchase program but expressed his doubt that a rate hike could arrive this year.

Draghi reiterates need for accommodative policy

In the announcement released 45 minutes ahead of Draghi’s appearance, the ECB left its benchmark interest rate unchanged at 0.0% and confirmed that it will continue to purchase €30 billion ($37.2 billion) each month until “the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”.

In the following press conference, Draghi reiterated these points in his introductory remarks and delivered an upbeat economic outlook, admitting that the expansion had accelerated more than expected in the second half of 2017.

In that light, Draghi stated that “the strong cyclical momentum and the ongoing reduction of economic slack strengthen our confidence that inflation will converge towards our inflation aim of below, but close to, 2%.”

The ECB chief noted that euro zone price pressures remained “muted” and considered that there were still no convincing signs of a sustained upward trend in inflation.

He further mentioned that recent volatility in the exchange rate was a source of uncertainty that the ECB would monitor.

“Overall, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term,” Draghi said.

Economic risks remain broadly balanced

The ECB president pointed out that the risks surrounding growth in the euro area are “broadly balanced”.

“On the one hand, the prevailing strong cyclical momentum could lead to further positive growth surprises in the near term,” he explained.

“On the other hand, downside risks continue to relate primarily to global factors, including developments in foreign exchange markets,” he added.

Draghi further offered his own summary of the introductory remarks: “To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for an ample degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2%.”

Draghi rules out rate hike this year

In the question and answer period, Draghi commented that the ECB agreed to make no changes to policy because of the current balance of risks and the need to return inflation to target.

He highlighted that there was only speculation regarding the next steps to be taken by the ECB and clearly indicated that there were three options that needed to be assessed with regard to the asset purchase program: a sudden stop, an extension of the program or a gradual tapering.

Draghi appeared to emphasize that the decision has not been made or discussed at the current point by ECB members.

Responding to a later question from a journalist about some speculation pointing to a rate increase this year, despite the ECB’s promise to keep rates at present levels for an extended period of time well past the horizon of the net asset purchases, Draghi was adamant in ruling out the possibility.

“Based on today’s data I can see very few chances that interest rates could be raised at all this year,” he said.

After the press conference, at 9:32AM ET (14:32GMT), EUR/USD traded at 1.2476 compared to 1.2415 prior to the speech, pulling away from a session high reached during the speech of 1.2536, while EUR/GBP was at 0.8723 from 0.8709 earlier, also off an intraday high of 0.8748.

Prior to the initial ECB announcement earlier, they had been trading at 1.2406 and 0.8704, respectively.

Meanwhile, European stock markets traded with mixed signs. The benchmark Euro Stoxx 50 fell 0.27%, France's CAC 40 edged up 0.10%, Germany's DAX lost 0.29%, while London’s FTSE 100 slipped 0.02%.

Draghi Rules Out Rate Hike This Year; All Options Open For ECB Asset Purchases

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