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Financial News: ECB To Maintain Rates, QE

ECB To Maintain Rates, QE

06/08/2017 - 04:25:00 (RTTNews)

(RTTNews) - The European Central Bank is set to retain its key interest rates and massive monetary stimulus in its policy session in Estonia on Thursday as policymakers are still unconvinced whether inflation will move closer to target despite the robust growth.

The Governing Council, led by ECB President Mario Draghi, is widely expected to keep all its three interest rates unchanged for a tenth consecutive policy session.

The announcement is due at 7.45 am ET on Thursday in Tallinn and Draghi is scheduled to hold his customary post-decision press conference at 8.30 am ET.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.

The bank is also expected to retain its asset purchases of EUR 60 billion a month till December 2017. The size was reduced in March from EUR 80 billion.

In the press conference, Draghi is expected to tread carefully to avoid any suggestion of tapering, but a subtle change in communication on the balance of risk and the forward guidance is likely, economists said.

The minutes of the April session showed that policymakers sought great caution in undertaking even small changes in communication so as to avoid market volatility similar to the 'taper tantrum' in 2013.

Policymakers would also be presented with the latest set of macroeconomic projections in the latest meeting, produced jointly by euro area national central banks and ECB staff.

Economists widely expect an upgrade to the growth outlook, while they foresee a downgrade to the inflation projections.

In March, the growth projections for this year and next were raised by a percentage point to 1.8 percent and 1.7 percent, respectively. Growth was seen slowing to 1.6 percent in 2019.

Inflation forecasts for this year and next were boosted to 1.7 percent and 1.6 percent, respectively. The projection for 2019 was retained at 1.7 percent.

The ECB, which targets inflation 'below, but close to 2 percent' has maintained that the recent upward trend in inflation was unconvincing.

And it is the main reason why Draghi and his team assert that the massive stimulus by way of asset purchases and negative interest rates is necessary to support the euro area economic recovery, which they say is "fragile."

Supporting ECB's caution, headline inflation tumbled to 1.4 percent in May, its lowest level thus far this year. The policy-relevant core inflation slid to 0.9 percent.

Underlying inflation has largely been stagnant thus far this year, except for a blip in April that was caused by a late Easter.

Hawks on the Governing Council are likely to continue their call for the removal of the downward bias in policy communication, mainly the reference to cutting rates further if needed. Draghi is unlikely to yield to such demands given the uncertain inflation path and better-than-expected growth, economists said.

Eurozone's unemployment rate dropped to 9.3 percent in April, the lowest in more than eight years.

An easing jobless rate suggests the sustained strong momentum in the labor market and is an encouraging sign for a rebound in wage pressures. However, significant underemployment is a cause for concern as it could delay the impact on wage growth in the near term.

The 19-nation economy maintained its robust growth momentum in the first quarter, expanding 0.5 percent, the same as in the previous three months. That is in sync with the ECB's view of solid and broad recovery.

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