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European Central Bank removes easing bias, but may taper bond purchases to zero by end-2018

The Governing Council of European Central Bank unanimously removed its explicit ‘easing bias’ today on its net bond purchases, providing a further signal that they are drawing nearer to a close. The easing bias had stated that the ECB stands prepared to increase purchases in terms of “size and/or duration”. Its removal implies that the monthly rate of purchases, currently EUR 30 billion, would not be increased. However, the ECB maintained its position that purchases would carry on until the end of September, “or beyond, if necessary”.

The change in the language of the central bank is likely to be the first step to choreograph an eventual winding-down of its asset program, noted Lloyds Bank in a research report. The bond purchases after September is expected to be tapered to zero by the end of 2018. This might give way for interest rates to be hiked by the mid-2019. The ECB repeated that interest rates would be kept at their present levels “for an extended period of time” and “well past” the horizon of asset purchases.

ECB President Mario Draghi played down the change today. Draghi argued that the removal of the easing bias on asset purchases was in line with greater sentiment that inflation would converge to the target of close to, but below, 2 percent. Meanwhile, it was too early to declare victory, given that inflation remains below target. Headline inflation dropped to 1.2 percent in February, while ‘core’ CPI excluding food and energy remained at just 1 percent.

The central bank’s new forecast GDP growth for this year was upwardly revised to 2.4 percent from 2.3 percent, but it was left unchanged at 1.9 percent in 2019 and 1.7 percent in 2020. The headline consumer price inflation projection was unchanged at 1.4 percent for 2018, while 2019’s forecast was revised down a bit to 1.4 percent and kept unchanged at 1.7 percent for 2020. The risks surrounding economic growth were still described as ‘broadly balanced’, although ‘rising protectionism’ was noted as a downside risk. The main message is that continued strong growth would lower spare capacity in the economy and eventually lead to a sustained rise in inflation.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Euro was bearish at -84.8436, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 128.035. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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