ECB keeps monetary policy on hold, likely to further postpone decisions

The ECB Governing Council decided to keep its monetary policy on hold today and kept its Forward Guidance unchanged, as widely anticipated. However, market participants and observers had at least expected that ECB president Draghi would hint at possible decisions in months ahead, as so far the central bank only decided to purchase bonds worth EUR 30 billion per month till September, noted Commerzbank in a research report. It was anticipated that the central bank would adjust its Forward Guidance in June on the basis of the growth and projections available then, therefore given a first hint for the end of net asset purchases.

However, this has become unlikely after today’s remarks by Draghi. The press conference mainly focused on the recent fall in euro area’s economic indicators. Initially, the ECB President said that the recent economic deceleration in the economy should also be seen against the background of the very dynamic development in the earlier quarters. Thus, the ECB had anticipated a normalization of growth momentum. But later Draghi made it evident that the ECB was worried about the development. Draghi stated that the Council requires additional time to gauge how solid and sustainable the economy in the euro area will lose momentum.

“It is unlikely that in a few weeks, at the Council meeting in June, the Council will have sufficient knowledge about the sustainability of the downturn in order to be able to take decisions on monetary policy”, stated Commerzbank.

By the time of the 14 June meeting, the European Central Bank is expected to have received another round of economic indicators, which are likely to fall further. Moreover, the ECB is expected to downwardly revise its growth projection for 2018 since it had anticipated in March that the euro area economy would expand 0.7 percent in the first quarter of this year on a sequential basis.

“If the ECB has to revise its projections further down in September, it is more likely to decide to continue its net purchases beyond the end of 2018, rather than phasing them out by the end of the year, as is currently expected – as this would further dampen interest rate hike expectations”, added Commerzbank.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bearish at -62.616, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 121.376. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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