The European Central Bank maintained its highly accommodative monetary policy stance at the end of its two-day meeting today, confounding expectations that it would take another baby step towards exiting from its stimulus program.
As widely expected, the ECB held its key rates and pace of asset purchases unchanged. However, following the small tweaks to the forward guidance seen at previous meetings this year, many analysts were anticipating the ECB to make further modifications to its statement by dropping its easing bias. But the ECB disappointed as it maintained its pledge that "the Governing Council stands ready to increase the programme in terms of size and/or duration".
The euro initially fell after the announcement, slipping to an intra-day low of 1.1478 against the US dollar. However, the single currency soon reversed higher after President Mario Draghi began his press conference where he repeated his recent upbeat assessment of the Eurozone economy. His remarks on inflation were not as positive and his overall tone was surprisingly dovish, but traders shrugged off Draghi’s comments to drive the euro towards Tuesday’s 14-month high, hitting 1.1573 dollars after the press conference ended.
Last month, Draghi had used an ECB forum in Sintra, Portugal, to signal that as the Eurozone economy improves, policy adjustment would be necessary. However, at today’s press conference, Draghi was far from suggesting that policy tightening was forthcoming and instead emphasized the need to be patient.
"We need to be persistent and patient because we aren’t there yet" stressed the ECB head, before adding that the Governing Council hasn’t even decided on an exact date when they will begin the discussion of stimulus withdrawal. Draghi said, "We also were unanimous in communicating no change to the forward guidance and also we were unanimous in setting no precise date for when to discuss changes in the future – in other words, we simply said that our discussions should take place in the autumn".
The lack of confirmation that the September meeting would be used to announce the possible start of tapering was an unexpected development and suggests any decision could be pushed back till October. Draghi also reiterated that a substantial degree of monetary accommodation was still needed despite the "robust" recovery, as wages and underlying inflation remain subdued.
The ECB’s latest stance opens the prospect that a full exit from the bond buying program is a long way off and that the central bank is in no hurry to abandon its easy monetary policy. However, looking at the reaction in forex markets, investors appear less convinced, with some analysts interpreting Draghi’s words as an attempt to portray any future reduction in the size of asset purchases as mere policy adjustment rather than tapering.
