Friday, 25 May, 2018

Mario Draghi warns growth in eurozone could slow, after downbeat data

European Central Bank leaves interest rate unchanged, despite slowing of EU economic growth The Latest: ECB keeps rates on hold amid mixed economic data
Cristina Norman | 27 April, 2018, 00:53

The ECB's official monetary policy statement and actual policy settings remained unchanged, while ECB President Mario Draghi shrugged-off growth momentum fears but ultimately gave traders little reason to bid the Euro higher.

The ECB was approaching the coming month with "prudence, patience and persistence", said Draghi, with the bank also indicating that it was in no rush to begin increasing borrowing costs.

But, investors will be waiting to see whether President Mario Draghi gives any clues away as to the future of the institution's asset purchasing program, with speculation mounting that the European Central Bank will prolong the massive scheme created to stimulate the region's economy by buying bonds.

This leaves the door open to ending lavish bond purchases by the close of the year. But recent economic data has been mixed.

Economists polled by Reuters ahead of the meeting expected bond purchases to end this year after a short taper and to see the first rate increase in the second quarter of 2019.

The Governing Council, led by ECB President Mario Draghi, left the key interest rates unchanged after the policy session in Frankfurt, in line with economists' expectations.

The bank's quantitative easing (QE) programme, in which it now buys €30bn (£26bn) a month of eurozone bonds, is set to end in September this year.

"This moderation may in part reflect a pull-back from the high pace of growth observed at the end of a year ago, while temporary factors may also be at work", he said. The Pound to Euro (GBP/EUR) exchange rate is now trending at levels of 1.1497.

One worry is that protectionist rhetoric from the United States could push down the value of the dollar, an economic anomaly as the Federal Reserve is likely to raise interest rates several times this year, a natural support for its currency.

In particular, winding back the bond-buying programme will depend on the ECB's success in driving inflation back towards its annual target of just below 2%.

A stronger euro would cap inflation, but would affect growth and exports.

Even if the currency impact were to bite, the European Central Bank has little scope to extend purchases much longer, suggesting it will take an extremely cautious approach to normalising policy, even if it risks erring on the side of caution and moving too late.

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