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ECB Keeps Markets Guessing on Monetary Policy

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Status quo on policy

The ECB (European Central Bank) released its latest monetary policy statement on October 20, 2016. In it, the central bank left its key interest rates unchanged. ECB chief Mario Draghi reiterated that the central bank expects interest rates to remain at their present levels or lower for an extended period of time. He further clarified that rates will remain low well beyond the current bond buying program.

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Reading of the economy and inflation

Draghi’s introductory remarks suggested that the central bank found economic growth to be “moderate but steady.” It noted that though downside risks to recovery remained, the region’s economy had been resilient to the negative impact of global economic and political uncertainty.

Real GDP (gross domestic product) in the Eurozone rose 0.3% quarter-over-quarter in 2Q16, a bit slower than the 0.5% pace it witnessed in 1Q16. The ECB expects growth in 3Q16 to be around the same pace as in the previous quarter. The central bank said, “Favorable financing conditions and improvements in corporate profitability continue to promote a recovery in investment.” However, lackluster overseas demand and the lackadaisical pace of structural reforms posed downside risks.

On the inflation front, the ECB noted that the rise in prices had been gradual and that the sizable monetary accommodation will remain in place until such time that inflation closes just below 2%.

Data from Eurostat shows that annual HICP inflation has risen to 0.4% in September from 0.2% in August. However, this rise is primarily due to an increase in energy prices with no signs of an increase in underlying inflation.

The impact of the statement release on financial markets was moderate. The headline stock indexes in France (EWQ), Germany (EWG), and Italy (EWI) rose 0.4%-0.6% on the day on October 20. Spain’s (EWP) Ibex was up 1.2%, while the UK’s (EWU) FTSE 100 rose just 0.1%.

In the next article, let’s look at the reasoning behind this stance and the possible way forward for the ECB.

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