Written By: Adrian Moore – Forex Focus
The European Central Bank’s (ECB’s) no-change stance drives the euro lower versus the pound sterling.
The ECB’s monetary policy in September was a non-event, with the governing council neither making any changes to the existing policy nor adding new ones as they voted to leave interest rates and non-monetary policies on hold. Interest rates on the main refinancing operations are currently at 0, with interest rates on the marginal lending facility and deposit facility at 0.25 percent and -0.40 percent respectively.
According to the policy statement, the central bank indicated that interest rates will continue to remain at present levels for an extended period of time, although they did not mention what the specific timeframe would be. As for non-monetary policy measures, the ECB confirmed that the monthly asset purchases will continue until the end of the existing calendar year or until inflation is brought in line with the bank’s projected target. The ECB currently runs a monthly net-asset purchase program of €60 billion.
In the press conference that followed the monetary-policy meeting, the president of Europe’s central bank, Mario Draghi, stated that interest rates will remain at current levels well past the end of the bank’s asset-purchase program, carried out along with reinvesting principle payments from maturing securities. The president went on to announce that the broad-based economic expansion in the eurozone accelerated more than expected in the first half of 2017; however, recent exchange-rate volatility could lead to uncertainty in price stability over the medium-term. The ongoing economic expansion has not translated into higher consumer prices, with inflation remaining subdued, and accommodation in the monetary policy is necessary to drive inflation higher. He also said that the central bank stands ready to raise the size and duration of the asset purchases if the economic outlook becomes less favourable.
The key points stated by Draghi in the press conference with reference to the economic activity in the eurozone are highlighted below:
Real gross domestic product (GDP) in the euro area points to broad-based growth, with the ECB projecting real annual GDP to rise by 2.2 percent in 2017, then 1.8 and 1.7 percent in 2018 and 2019 correspondingly.
Monetary-policy measures are lending support to domestic demand.
Rises in corporate investments are supported by favourable financial conditions and corporate profits.
Growth outlook in the eurozone remains broadly balanced with chances of better than expected economic growth, while downside risks are largely associated with global factors, including the forex (foreign exchange) markets.
Annual HICP (Harmonised Index of Consumer Prices) inflation, which was at 1.5 percent in August, could decline going forward, reflecting energy prices. The bank has projected annual HIPC to remain at 1.5 percent in 2017, 1.2 percent in 2018, before rebounding to 1.5 percent in 2019.
Credit to non-financial corporations rose to 2.4 percent annually in July of this year from 2.0 percent a month earlier, with household credit unchanged at 2.6 percent.
In the United Kingdom, headline inflation is close to 3 percent on an annual basis, higher than the central bank’s projected target of 2 to 2.5 percent; and in the United States, consumer inflation remained above the central bank’s 2-percent target until May of this year before slipping modestly. However, the Harmonised Index of Consumer Prices (HICP) inflation in the euro area has remained below the ECB’s 2-percent inflation target since 2013, leaving the central bank of the 19-nation euro area not much of a choice when it comes to hiking rates.
The interest-rate decision was in line with market expectations and had no major impact on the EUR/USD, although the single currency slid versus the pound sterling following the ECB’s monetary-policy announcement. The pound sterling settled at 1.1378 on September 15, rising almost 4 percent in one week following the ECB meeting.
The ECB is very clear that it will not alter its monetary policy unless inflation rises close to the bank’s target of 2 percent. The dovish stance following the September monetary-policy meeting puts to rest the hawkish statements from some of the policymakers prior to the July meeting and diminishes market interest in the forthcoming policy meeting scheduled for October.
After all is said and done, it is very clear that interest rates are not going to change anytime soon, at least not until mid-2018. However, the big question facing market experts is: “Will the ECB signal an end to asset purchases when they meet in December, or will they continue with the current easy-money policy?”
The governing council of the European Central Bank next meets on October 4 for non-monetary measures followed by the monetary-policy meeting on October 26.