The investment community has broadly welcomed the European Central Bank’s decision to keep interest rates unchanged with many economists saying that there are now signs that the Eurozone economy is inching towards a period of sustainable, though modest, growth after years in the doldrums.
The ECB’s governing council decision, announced yesterday, was made despite a pick-up in inflation in the Eurozone, which now stands at 2%, slightly above the bank’s target of just below 2%.
The decision to keep borrowing costs on hold in the 19-nation block was also made in spite of the fact that the central bank has modestly revised upwards its growth forecasts and now expects 1.8% in 2017 (up from 1.7% in previous forecasts) and 1.7% in 2018 (from 1.6%).
European banking shares, the euro and bond yields have all risen strongly since the ECB signalled a turning point in the single currency area’s economic fortunes.
The bank is committed to continue its €80 billion-a-month quantitative-easing scheme until the end of 2017, although, as previously announced, it will be reduced to €60 billion a month from April.
At a news conference, Draghi said that the risks of deflation have now “largely disappeared” while indicating that the bank’s bond-buying programme, aimed at boosting the economy, would remain unchanged.
“There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance”, he said.
Howard Archer, chief European and UK economist with IHS Global Insight, said there were now clear signs “that the ECB is starting to change its tone on monetary policy and is inching towards a shift in its policy stance”.
Aberdeen Asset Management Investment Manager Patrick O’Donnell said that Draghi had “ever so slightly” opened the door to changing the ECB’s policy stance.
“He’s done this by saying that the governing council talked about changing the language about where rates are in their monthly statement, but didn’t actually change it.
“This is effectively him signalling that something might change in the future, just not today.
“Markets will now start to recalibrate on the assumption that the ECB will remove accommodation towards the end of the year.”
Sandra Holdsworth, co-manager of the Kames Absolute Return Bond Global Fund, said that Draghi’s decision to remove from his statement a sentence referring to the ECB’s commitment to “act using all instruments available within its mandate”, a phrase that has occurred in ECB statements following previous council meetings, was significant in that it “formally signifies a small upgrade of its economic assessment and risks”.
“We expect fixed-income markets to start to reflect the increased likelihood of a removal of monetary accommodation over the medium term which is likely to lead to higher yields.
“Like Mr Draghi we expect this to be modest unless core inflation rates start rising meaningfully.”
©2017 funds europe
