ECB Leaves Monetary Policy Unchanged

The ECB held its benchmark refinancing rate at 0 percent for the eleventh consecutive meeting on June 8th and closed the door to further rate cuts, as the Euro Area economy is expected to expand faster than previously estimated and the risks to the growth outlook are now broadly balanced. The central bank also left the pace of its bond-purchases unchanged, saying a very substantial degree of monetary accommodation is still needed to support inflation in the medium term.

Excerpts from the Introductory statement to the press conference by Mario Draghi:

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that our net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. 

Our monetary policy measures have continued to preserve the very favourable financing conditions that are necessary to secure a sustained convergence of inflation rates towards levels below, but close to, 2% over the medium term. The information that has become available since our last monetary policy meeting in late April confirms a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected. We consider that the risks to the growth outlook are now broadly balanced.

At the same time, the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in May, following 1.9% in April and 1.5% in March. As expected, the recent volatility in inflation rates was mainly due to energy prices and temporary increases in services prices over the Easter period. Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to remain around current levels in the coming months. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation. Underlying inflation is expected to rise only gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack.

The ECB cut its inflation forecasts for the next three years on lower energy prices. The central bank expects inflation of 1.5% this year, down from a March forecast of 1.7%. Also, it expects 2018 inflation at 1.3% (from 1.6%) and 2019 inflation at 1.6% (from 1.7%). Meanwhile, the ECB upgraded its growth forecasts for this year to 1.9%, up from an earlier forecast of 1.8%. Also, ECB expects 2018 GDP growth at 1.8% (from 1.7%) and 2019 GDP growth at 1.7% (from 1.6%).

ECB | Joana Ferreira |
6/8/2017 3:50:53 PM