ECB Stands Firm on Stimulus, But Signals Easing Urgency
The European Central Bank (ECB) has reaffirmed its commitment to keeping its aggressive stimulus policy in place until at least the end of the year. In a surprise move, ECB President Mario Draghi announced that the bank had removed a key phrase from his standard introductory statement, which had pledged to act 'using all the instruments available within its mandate' if needed to achieve its objectives.
This change signals that there is less urgency in taking further actions to prop up growth and inflation in the Eurozone. Draghi explained that this decision was made because the risks of deflation have subsided, and the bank's assessment is that there is no longer a sense of urgency to take further action.
The move was seen as positive by markets, with German 10-year bond yields rising by 5 basis points to hit a one-month high of 0.43 per cent. The euro also rose to its day's high at $1.0605, up more than half a percent on the day.
The ECB has also upgraded its inflation expectations for this year and next, with headline inflation now seen at 1.7 per cent this year compared to an earlier estimate of 1.3 per cent. However, Draghi stressed that there is still no convincing upward trend in underlying inflation, and that inflation is expected to rise only gradually in the medium term.
The ECB's leadership has faced calls from Germany to start winding down its 2.3 trillion euro bond-buying scheme, but the bank has stuck to its plan of continuing the purchases until December. The bank will also keep interest rates at current record-low levels until long after that, or even cut them if necessary.
Draghi justified this stance by citing the upgrades in inflation expectations and arguing that they do not alter the overall picture. He added that the bank is ready to increase the programme in terms of size and/or duration if the outlook becomes less favourable or financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation.