World Economy

ECB Makes Changes to Monetary Policy Outlook

The ECB dropped its easing bias and also opted to keep interest rates unchanged while continuing its asset purchase program until September
ECB President Mario DraghiECB President Mario Draghi

The European Central Bank dropped its easing bias on Thursday, fueling expectations that it will normalize monetary policy in the euroland.

Until now, the ECB has stated that it stands ready to increase the level of bond purchases it makes in both duration and/or size, in case the economic outlook deteriorates in the eurozone, CNBC reported.

But it removed such statement from its communication Thursday, following a monetary policy meeting, indicating that stimulus in the region could come to an end in the near future.

ECB President Mario Draghi said Thursday that the solid economic recovery in the region supported the decision to remove the so-called easing bias.

"Incoming information... confirms the strong and broad-based growth momentum in the eurozone economy, which is projected to expand in the near-term at a somewhat faster pace than previously expected."

The bank has risen, slightly, its forecasts for real gross domestic product since its last forecasts in December. The ECB now expects real GDP to hit 2.4% in 2018, 1.9% in 2019 and 1.7% in 2020. "The outlook for real GDP growth has been revised up for 2019 and remains unchanged for 2020 and 2018," Draghi said.

Viraj Patel, forex strategist at ING, told CNBC that Draghi did "just enough to appease the hawks in the committee. It's the confirmation that normalization is on track," he said.

Euro Higher

As a result, the euro rose against the dollar on the more hawkish movement from the central bank, trading at $1.241 at about 12:55pm GMT.

Draghi said that the ECB is monitoring the exchange rate "with regard to their possible implications for the inflation outlook."

Back in January, the ECB said that the exchange rate was a "source of uncertainty". This is because the currency had surged since the start of the year, especially against the dollar. A stronger euro could have an impact on European exports and affect prices in the region. As a result, the bank could be forced to change its monetary policy.

No Change in QE

The bank also opted to keep interest rates unchanged and to continue its asset purchase program until September. It said that "the Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases" that is set to last until September 2018.

At the ECB's last monetary policy meeting in January, policymakers agreed that it was too early to make changes to the current level of stimulus, but admitted there could be changes in "early" 2018.

For now, the quantitative easing program will continue at the pace of €30 billion ($36.92 billion) per month. The bank also said that the stimulus could go beyond September if economic conditions change.

However, analysts hold very different views regarding the future of the quantitative easing program. Wolfgang Kiener, senior analyst at BayernLB, told CNBC via email: "Given only a slow increase of core inflation, we expect the ECB to reduce QE from October on to €15 billion per month and to stop it altogether at the end of year."

But Mike Bell, global market strategist at JPMorgan Asset Management, said that due to solid economic growth and an expected fall in unemployment across the eurozone, "the ECB is likely to feel comfortable ending QE in September."

A Rebuke to Trump

In what’s seen as a rebuke to President Donald Trump, Draghi laid out why he sees trade as one of the two main risks today—and why the state of international relations is a big worry, MarketWatch reported.

“If you put tariffs against your allies, one wonders who the enemies are,” Draghi said at a news conference after the central bank’s monetary policy meeting.

Of course, the ECB chief didn’t directly mention the US. But he clearly signaled his disapproval of the Trump administration’s plan to slap tariffs on steel and aluminum imports. After the ECB meeting on Thursday, Trump moved ahead with the tariffs, signing proclamations that will tax steel imports by 25% and aluminum by 10%.

Draghi pointed to the risk US protectionist measure post to the dollar and to the global economy, as well as to the established way of dealing with trade relations. “We are convinced that disputes should be discussed and resolved in a multilateral framework, that unilateral decisions are dangerous,” Draghi said.

Add new comment

Read our comment policy before posting your viewpoints