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Financial News: ECB's Massive Stimulus To Remain Until Inflation Hits

ECB's Massive Stimulus To Remain Until Inflation Hits Target

01/25/2018 - 08:33:00 (RTTNews)

(RTTNews) - The European Central Bank left its key interest rates and asset purchases unchanged on Thursday and reiterated its forward guidance that rates will remain at present level well past the life of the stimulus and that it is ready to raise the size as well as duration of asset buys, if needed.

The Governing Council, led by ECB President Mario Draghi, left the key interest rates unchanged after the conclusion of the final policy-session for this year, in Frankfurt.

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.

Ahead of the meeting, the focus was on the wording of the forward guidance after policymakers agreed in December to 'revisit' it early this year. In contrast to expectations, there was no change in the language of the forward guidance. Policymakers expect the forward guidance to gain prominence, going forward.

"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the ECB reiterated.

The bank confirmed that the net asset purchases, at the new monthly pace of EUR 30 billion, are intended to run until the end of September 2018, 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.

"If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration," the ECB added.

Draghi is set to hold his press conference at 8.30 am ET in Frankfurt.

The ECB Chief is unlikely to give a clear signal for the gradual winding down of stimulus, or tapering, this month as inflationary pressures remain weak in the 19-nation economy and the recent strengthening of the euro is likely to add to that.

Many observers and economists think it is a given that the ECB would end its massive stimulus sometime after September this year, the only question is "when?". Most of them also expect an interest rate hike to come only in late 2019.

Headline inflation eased to 1.4 percent in December, which is well below the ECB's goal of "below, but close to 2 percent". In December, the ECB staff projections showed that inflation would remain short of its target into 2020, which Draghi called a "muted" news that warrants support from massive monetary stimulus.

The hawks on the Governing Council are apparently calling for an abrupt or early end to asset purchases due to the robust economic climate. The economy grew 0.6 percent in the third quarter.

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