European Central Bank keeps Eurozone interest rates on hold

The ECB is on Thursday expected to resist calls to tighten policy as it casts a cautious eye ahead to high-risk elections in the Netherlands and France during an upsurge in populist, anti-establishment sentiment.

As previously outlined, the European Central Bank will continue to make purchases under the asset purchase programme (APP), although this will drop from the current monthly purchase pace of €80bn (£69.3m, $85.4m) to €60bn from April.

Contingency plans for the bond markets for the upcoming elections?

The ECB announced that it will leave interest rates on hold, with the main rate at a historically low 0%, the deposit rate at -0.4%, and the marginal lending rate at 0.25%.

Expectations for an interest rate hike by the Federal Reserve in March continued to grow yesterday, with Fed funds futures now fully pricing in the possibility that policymakers will raise rates at the 15 March meeting. His tone regarding inflation as well as the new staff forecasts published by the Frankfurt-based institution.

Draghi credited the bank’s stimulus for the improvement in the economy and said that data suggest growth will continue “to firm and broaden”. It was the first time since 2013 that the monthly inflation rate outstripped the ECB’s own mandate.

“March 2017 European Central Bank staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.7% in 2017, 1.6% in 2018 and 1.7% in 2019”, the ECB’s introductory statement said. The reaction in the Euro will be driven nearly entirely by the tone of Draghi’s press conference.

A key element will be whether Draghi maintains a generally very cautious stance or whether there is a slight shift to recognise improved conditions.

“The euro area economy remains weak and unemployment rates are too high to allow for a quick return to price stability and for an end to the expansive monetary policy”, said Marcel Fratzscher, head of Germany’s DIW economic think-tank.

Mr Draghi signalled the policies would continue for short-term, after revealing that the scaling back of measures had not been discussed among European Central Bank council members. In the course of the press conference, it nearly seemed as if some hawks were sitting under Draghi’s desk and were fiddling with his papers. The ECB chief is likely to push against any suggestion that tapering had been discussed, although any slight shift in rhetoric would be seized upon by the market.

Draghi foreshadowed this decision in December by vowing bond purchases will be extended until at least the end of 2017.