European Central Bank keeps key interest rates unchanged, to proceed with QE

The notably more upbeat tone in Mr Draghi’s assessment of economic prospects for the Euro area, even though there have been no corresponding upward revision to GDP growth forecasts in the ECB’s new projections suggests the European Central Bank might slowly start to take small steps towards reconsidering its policy stance.

Elections in key eurozone member states France, the Netherlands and Germany coming up this year have all clouded the outlook for the European Central Bank, with parties sceptical of the single currency lined up to make gains. The strength of the U.S. economy and potential stimulus from President Donald Trump’s fiscal plans have traders expecting the Federal Reserve to hike the federal funds rate next week.

However with Germany’s trade data potentially telling a similar story the Euro may not be in the position to immediately take advantage of Sterling’s weakness.

In the United Kingdom, the country’s economic growth forecast for 2017 has been revised upward by The Office for Budget Responsibility (OBR) to 2%, from its previous forecast of 1.4%.

Currency options show little expectation among traders of any immediate action by the Governing Council. The ECB will likely try and strike a balance between the political and policy risks this year, whilst it is apparently growing more confident of the economy.

“Now these risks – some of them – have materialised, but we haven’t seen yet a significant economic impact”.

As the reports of the European Central Bank officials discussing raising rates surfaced, the euro rose against both the dollar and the pound sterling, also supported by the ECB’s upward revision of its growth and inflation targets for 2018.

The bank also said it expects interest rates to remain “at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases”. After policy makers’ preferred gauge of future price developments approached levels of below but close to 2 percent at the end of past year – signaling the ECB’s goal was in sight – it’s now on the wane once more.

But Draghi also signalled there was now less of a need to prop up growth and inflation. It saw prices rising a flat 1.7 percent in 2019.

The unemployment rate of 9.6% is the lowest since May 2009.

The asset purchase programme is set to be trimmed back from €80 billion to €60 billion per month from April, but no further changes have been announced. The Governing Council left the main refinancing rate at 0%, while the rate on deposits parked overnight at the bank remains at minus 0.4%. That is in effect a tax aimed at pushing banks to lend the money, not stash it at the ECB.

Now that inflation has reached 2 percent, calls have arisen to start withdrawing the stimulus, particularly in Germany where the stimulus was never popular in the first place.

United Kingdom stocks have pulled back after investors sensed a hint of negativity in the statement, although the government has also now built something of buffer having saved over 16bn in borrowing over what it expected to borrow, due to relief from referendum fears not materialising.