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European Central Bank meeting in Tallinn: Interest rates unchanged

22 Juin 2017

"That would suggest that it would be very hard for the rate hawks on the governing council to force through an early departure from the very accommodative policy that the European Central Bank is pursuing right now", said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

The bank also retained its asset purchases of Euro 60 billion a month till December 2017.

The ECB now expects growth across the eurozone to be 1.9% in 2017 compared with its March forecast of 1.8%. So far, measures of underlying inflation continue to remain subdued. The real discussion on changes to monetary policy has been postponed. In particular, core inflation, which excludes volatile prices for fuel and food, remains stuck at 0.9 per cent.

The eurozone economy is expected to grow at a faster rate than previously expected. It follows an upward revision to first quarter Eurozone GDP growth from 0.5% to 0.6% quarter-on-quarter earlier today. Nevertheless, the central bank slightly raised its growth projection for the next few years, now expecting the region's economy to expand 1.9% this year, 1.8% in 2018 and 1.7% in 2019, citing stronger growth momentum in the region.

That means Draghi is likely to tell reporters Thursday that risks to the economic outlook are now broadly balanced, May said.

Separately, Germany's seasonally adjusted industrial production rebounded more-than-expected by 0.8% on a monthly basis in April, painting a fairly bright picture of the health of the nation's industrial sector. And remember, price stability-as defined by the inflation target-is the ECB's sole policy mandate.

Bond-buying and low interest rates were introduced at a time when the European Central Bank feared deflation - or steadily decreasing prices that undermine economic activity. It pays for the purchases with newly created money.

It also confirmed that it would continue with its €60bn per month asset purchase programme until at least the end of 2017 - and maintained the pledge to expand it if conditions deteriorate.

The purchases push that new money into the economy, a step that can increase inflation.

A very low conservative party majority would introduce an element of uncertainty into financial markets that would most probably show up with a weakening of the British pound. That is among the reasons the European Central Bank is reluctant to roll back on monetary easing policies as it can create uncertainty in financial markets.

If the Fed indicates that it will pursue a more aggressive pace of monetary tightening over the course of the year this could boost the appeal of the US Dollar, regardless of political jitters. "If you ask me, 'but in case things were to worsen are you ready to lower interest rates?' The answer is yes".

The decision marked the fifth consecutive quarter that the central bank has held rates steady at 0.00% and will come as little surprise to market watchers, who were largely anticipating a continuation of the status quo.

European Central Bank meeting in Tallinn: Interest rates unchanged