European Central Bank did not discuss sudden end to stimulus

Marco Green
December 14, 2017

As reported at 11:04 am (GMT) in London, the GBP/USD was trading at $1.3441, a gain of 0.21% and not too far from the session peak of $1.3466; the session trough is set at $1.3398.

With the eurozone economy showing strong growth, the European Central Bank left its interest rates and stimulus measures unchanged Thursday as it looks ahead to the delicate matter of ending its bond-purchase program next year.

"The governing council confirms that from January 2018 it intends to continue to make net asset a monthly pace of €30 billion, until the end of September 2018, or beyond, if necessary", the bank said in a statement. A gradual reduction after that could extend the duration of the stimulus.

Draghi also stressed that there were no discussions in the Governing Council regarding a sudden stop of asset purchases or tapering. And the zero rate interest rate policy has also raised concerns that it may be driving unsustainable increases, or bubbles, in some asset classes, as investors take more risks to hunt for yield. An unexpected cooling in a key measure of United States inflation means FedReserve policy makers may be hard-pressed to raise interest rates more aggressively in 2018.

The U.S. dollar gained against the euro on Thursday after the European Central Bank raised growth and inflation forecasts for the euro area, but stuck with its pledge to provide stimulus for as long as needed.

The bank raised its forecast for growth next year to 2.3 percent from 1.3 percent in the last set of forecasts issued in September.

The Swiss National Bank predicted inflation will exceed its mandate in late 2020, though said it won't rush to raise rates.

The central bank's deposit rate, now at minus 0.4 percent, has depressed the euro since going negative in 2014.

Having faced five years of anemic inflation, the ECB has deployed its entire policy arsenal, cutting rates into negative territory, giving banks cheap loans and hoovering up bonds with an unprecedented 2.55 trillion euros ($3 trillion) of purchases.

The European Central Bank has raised its forecast for growth and inflation as the eurozone enjoys an economic upswing. And central bankers are leery of startling financial markets that have been supported for years by the steady introduction of newly printed money into the financial system through bond purchases. The dollar had weakened on Thursday after the Fed left its rate outlook for the coming years unchanged even as policymakers projected a short-term jump in USA economic growth from the Trump administration's proposed tax cuts.

Draghi said neither the structure of the bond-buying program nor a change in guidance were discussed on Thursday, but he acknowledged that the outlook for interest rates will gain importance in the coming months. The bank decided in October to reduce the purchases to 30 billion euros ($35 billion) a month from 60 billion euros and to extend them at least until September, or longer if necessary.

Shifting the ECB's message on stimulus may have been made easier by a benign market reaction to the Federal Reserve's third, well-telegraphed interest rate hike this year late on Wednesday.

The main refinancing rate, which determines the cost of credit in the economy, remained unchanged at 0.00 percent while the rate on the marginal lending facility - the emergency overnight borrowing rate for banks - remains at 0.25 percent.

Other reports by Click Lancashire

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