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The European Central Bank (ECB) kept its main rates unchanged and maintained the bond-buying program at Thursday's meeting despite the uptick in inflation seen across the eurozone. President Draghi argued the increased levels of annual inflation rates had not yet displayed a convincing trend for the ECB to amend its monetary policy. In the press conference that followed, Draghi said that Governing Council will continue to look through changes in HICP (Harmonised Consumer Price Index) inflation if judged to be transient and it will have no implication for the medium-term outlook for price stability.
Draghi described the current eurozone recovery as "dampened by the sluggish pace of structural reform" and said a "very substantial degree" of monetary policy stimulus was still needed. ECB officials pointed to elevated levels of political uncertainty throughout 2017. A series of elections are scheduled to be held this year, including in the Netherlands, France, Germany and Italy.
"In our view, core inflation will stay below 1.0% on average this year, as wage pressure will stay subdued particularly in the periphery countries. Hence, we expect the ECB to continue its QE purchases in 2018," said Danske Bank in a research note.
Draghi also moved to reassure lawmakers in Germany, and elsewhere in the euro zone, to try and stay patient with the ECB. He noted that current lower interest rates will pave way for higher real interest rates as recovery gathers pace. He said that recovery of all of the euro zone is in the interests of everybody, including Germany.
"While we think the primary intention of today’s ECB press conference was to downplay any market concerns that policy might be adjusted any time soon, we think there were some subtle changes in a number of phrases that might provide greater scope for an eventual shift to a less accommodative stance." notes KBC Bank in a research note.
The press conference did not contain any dramatic changes. But, if activity and inflation data remain on a strong trajectory in coming months, we could see some unpleasant ‘recalibrations’ on interest rate markets. KBC Market Research sees no prospect of early policy change but a possibility of scaling back of purchases in 2017.
EUR/USD slips below 1.06 on dovish Draghi's comments. The knee-jerk in the pair found decent support around 1.0580 prompting buyers to return to the markets. EUR/USD closed in the green on Thursday. The pair 0.23 percent lower on the day at 1.0638 at 1100 GMT. Breakout of 1.0719 (high Jan.17) would open the door for further upside. 50-DMA at 1.0577 is strong support on the downside. We see weakness only on break below.
