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ECB keeps policy unchanged, asset purchase program likely to be tapered after September

The European Central Bank kept its policy on hold today, as expected. Also, it did not make any changes to its ‘forward guidance’. During the press conference, ECB President Draghi carried on with dovish tone, noting in particular that domestic inflationary pressures continue to be weak. However, that was not sufficient to stop the depreciation of the U.S. dollar in the near term as the euro appreciated above 1.25 during the press conference.

The interest rates were left unchanged by the ECB, while net monthly asset purchases were maintained at EUR 30 billion until “the end of September 2018, or beyond, if necessary”. It also kept its policy sequencing unchanged, namely that interest rates are likely to stay at “present levels for an extended period of time and well past the horizon of the net asset purchases”.

The central bank also confirmed that maturing assets would be reinvested “for an extended period of time after the end of its net asset purchases”. After the apparently ‘hawkish’ minutes of the December meeting, there had been some speculation that the forward guidance on the asset purchase program might be altered, noted Lloyds Bank in a research report. The central bank described the rate of euro area’s economic growth as “robust”, but domestic price pressures continue to be “muted”.

“Overall, we anticipate the APP will be tapered after September, with net purchases finishing by the year-end, paving the way for interest rates to be raised in the middle of 2019”, stated Lloyds Bank.

This would be hinted before time, with the central bank indicating that plans to “transition” its forward guidance on asset purchases more broadly to monetary policy as a whole.

“The risk to the policy outlook, however, is that weaker-than-expected inflation pushes back the end of the APP or increases the gap between the end of asset purchases and the first interest rate rise”, added Lloyds Bank.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bullish 58.4049, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -101.109. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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