ECB keeps interest rate unchanged, revises up GDP and inflation forecast

The European Central Bank today kept its key interest rate on hold as expected. Therefore, the deposit rate continues to be at -0.4 percent, the refinancing rate at 0 percent and the marginal lending rate at 0.25 percent. The central bank repeated that asset purchases would continue in the New Year until at least the end of September 2018, but at half the current monthly EUR 60 billion rate. But, there was no information on the composition of purchases, although there is speculation that the share of corporate bond purchases might be increased, noted Lloyds Bank in a research report.

Significantly, ECB’s forward guidance on interest rates was left unchanged. Therefore, interest rates are likely to “remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”.

ECB President Mario Draghi sounded more upbeat regarding the economic outlook and expressed greater sentiment about inflation returning to the ‘close to, but below, 2 percent’ target in the medium term. Draghi noted a solid rate of economic growth and a considerable rebound in the outlook of growth. Draghi also indicated that the output gap will close in the course of 2018, which will help drive underlying inflation higher.

The central bank revised up the GDP growth forecasts for this year to 2.4 percent from 2.2 percent. It also revised up projections for 2018 and 2019 to 2.3 percent, 1.9 percent, respectively. It expects economy to expand 1.7 percent in 2020. Meanwhile, inflation is expected to reach 1.5 percent this year. However, the ECB has upwardly revised the 2019 projection to 1.4 percent from 1.2 percent, due to higher oil and food price assumptions. It expects inflation rate of 1.5 percent and 1.7 percent for 2019 and 2020, respectively.

“Looking ahead, we expect the ECB to wind down its asset purchase programme after next September, possibly communicating its intentions around July. Taking its forward guidance on interest rates at face value, we anticipate the ECB will not start raising interest rates until Q2 2019”, added Lloyds Bank.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bearish at -51.9177, while the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -139.121. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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