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ECB in wait-and-see mode, inflation likely to decelerate in months ahead

The European Central Bank met today for its rate decision; however, there were no surprise announcements. During its meeting in March, the central bank titled in a ‘dovish’ direction by changing its forward guidance on interest rates to say that these would remain unchanged, at least through the end of 2019, and by announcing a new targeted longer-term refinancing operations program. This time, in spite of an acknowledgement from ECB President Draghi that economic growth continues to surprise on the downside, the ECB made no further changes to policy. It did not give any further detail on TLTRO-III with Draghi merely noting that this would “be communicated at one of the forthcoming meetings”.

Draghi added a little to comments made at the end of March implying that the central bank might want to mitigate the side effects on banks of negative interest rates. He stated that they have not as yet discussed the pros and cons of mitigating tools but that this would be assessed and more would be said at upcoming meetings, noted Lloyds Bank in a research report. This appears to be a signal that the ECB might move to a system of tiering of interest rates for banks’ excess reserves it holds.

In all, today’s important message is that while the European Central Bank is in wait-and-see mode for now, that does not rule out further actions. Draghi noted that incoming economic data continues to be soft and that ‘headline’ inflation is expected to fall over months ahead, while underlying inflation continues to be muted. Furthermore, he repeated that the risks to growth are still skewed to the downside. However, the ECB’s expectation continues to be that economic growth will pick-up through the year and that inflation would gradually return to target.

“So he didn’t think further action was required at this stage. However, he did acknowledge that the Council remained ready to act if “contingencies warranted” and that the June review of its economic projections would offer the opportunity of a further review. That message was pretty much in line with expectations but was still enough to initially push the euro modestly lower”, stated Lloyds Bank.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bullish at 65.2566 while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -22.8371 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

By Aditi Awati
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