ECB Takes Tiny First Step Towards Policy Normalisation
As expected, the ECB left all benchmark interest rates unchanged following the latest Council meeting on March 9th with the main refi rate at 0.0% and the deposit rate at -0.40%.
There were also no changes to the quantitative easing programme with bond purchases set to decline in April to EUR60bn per month from EUR80bn as announced at the December 2016 meeting.
Bank President Draghi was more optimistic surrounding the economic outlook and the main message was that downside risks to the economy had diminished. He also welcomed an increase in inflation expectations and stated that the balance of risks had become more favourable. Although Draghi warned that it was too early to sound the all clear on raising inflation, he was cautiously optimistic over the outlook.
In this context, there was a significant technical change with the ECB dropping its previous statement that ‘it was ready to act by using all instruments in its mandate if warranted to achieve its objective’.
Essentially, this means that the ECB will not cut interest rates further. This is a very small step and the bank will maintain a very accommodative monetary policy over the next few months.
If the Euro-zone economy continues to improve, however, then this meeting will mark a significant turning point. The ECB will not ease policy any further and gradually edging towards policy normalisation with a very slow process of monetary tightening. Politically, it will be much easier to announce a limited tightening once the French Presidential election is out of the way in May.
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