European Central Bank makes modest change as growth picks up

Reuters

Reuters

The currency bloc has been on its best economic run since the global financial crisis almost a decade ago with millions of jobs created since the ECB's stimulus effort started.

The currency bloc's economy has been on its best run since the global financial crisis almost a decade ago but the European Central Bank was expected to take a more cautious stance as the inflation rebound has yet to show a convincing upward trend.

"This easing bias is now gone.The ECB's official policy decision signals the ECB's first baby step towards tapering [of its asset purchase programme]".

Sources have told Reuters the European Central Bank is likely to nudge up its growth forecasts but trim its estimates for inflation when it presents its new staff projections for 2017-19. The central bank has removed any reference to a possible lowering of the interest rate.

Although German industrial production rebounded further than forecast in April this was not enough to shore up the Euro US Dollar exchange rate on Thursday morning.

With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at -0.4 per cent.

Analysts expect that provision to be dropped in coming months as the bank edges toward announcing how it will phase out the bond purchases next year.

Sterling hit a two-week high of $1.2977 earlier in the session after polling organizations' last surveys, but weakened later in the day to trade down 0.13 percent at $1.2942.

"Nothing substantial has happened to inflation except the price of oil and the price of food. underlying inflation has remained the same year to year", he noted. Market participants have turned their attention to the United Kingdom, where voting ends at 10pm local time and exit polls are expected to be released shortly afterward.

Mr Draghi's continued focus on getting inflation up has so far cooled investors on the single currency, with the 2017 inflation forecast cut on Thursday to 1.5 per cent from the previous 1.7 per cent forecast back in March, and the 2018 forecast cut to 1.3 per cent from 1.6 per cent. That is still well below its target of just under 2 percent. Right now inflation is at 1.4 percent in the year through May.

The pound has dropped quickly into $1.27's against the United States dollar and €1.13's against the Euro already.

The ECB's nuanced stance was also motivated by the big debts overhanging governments and companies, the piles of unpaid loans weighing on banks in countries like Italy and Portugal, and political uncertainty ahead of elections in Germany and Italy.

But any announcement on its quantitative easing (QE) programme is likely to be put off until the autumn, when policymakers hope the economic picture will have become clearer. In a further blow for euro bulls, Draghi confirmed that the Governing Council had not discussed policy normalization at the June meeting, suggesting such a debate probably won't start before the September meeting.

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