Trade row has ECB's Draghi anxious over state of global relations

Daniel Fowler
March 11, 2018

Interest rates were left unchanged which was to be expected, however they removed the wording "easing bias" from the asset purchasing statement which has led investors to believe that the Quantitative Easing program will be tapered towards the back end of the year and removed before the start of 2019.

The ECB added that monthly net asset purchases of €30 billion were meant to run until the end of September, or beyond, if necessary. There are no changes compared to November, when it was made a decision to reduce asset-buying program in half and lengn it until September.

'The ECB, as expected, tweaked their policy guidance to drop the so called easing bias, meaning a willingness to increase the size and duration of the QE asset buying programme if necessary.

Donald Trump's "trade wars" have arguably stolen the headlines and the US President has now officially signed an order raising Aluminium and Steel imports tariffs. And this is what is ultimately hawkish about the statement, regardless of Draghi remaining open to all possibilities, by the way, as all central bankers always are.

Most observers expect little change in new growth and inflation forecasts also due from Draghi.

While ECB inflation projections have consumer prices hovering around the 1.5% inflation rate by the end of 2018 and rising gradually over the medium term, Draghi told reporters that underlying inflation measures will remain subdued - so "victory can not be declared yet".

Germany's 10-year bond yield rose 1 bps to 0.64 percent.

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However, at the last communication of the European Central Bank is missing one sentence, which has so far been present in the announcement of monetary policy decisions, that under less favorable prospects (including inflation) the Governing Council will be ready to increase the size and/or duration of the asset purchase program. That, in theory, should lower borrowing rates and raise inflation and growth.

The inflation forecast for this year was maintained at 1.4 percent, while the outlook for next year was trimmed to 1.4 percent from 1.5 percent.

Projections for next year and 2020 were kept unchanged at 1.9 percent and 1.7 percent, respectively.

The euro forfeited early gains against the dollar to decline after Mr Draghi said monetary policy would remain "reactive" and measures of underlying inflation were still subdued. MSCI's gauge of key world stock markets gained 0.27 percent, while the pan-European FTSEurofirst 300 index rose 1.03 percent. A full, transparent and consistent implementation of the Stability and Growth Pact and of the macroeconomic imbalance procedure over time and across countries remains essential to increase the resilience of the euro area economy.

The target of the European Central Bank is to buy debt until inflation continues to accelerate to around 2% - a level that cannot be reached and held for nearly five years.

Looking ahead the Euro US Dollar exchange rate may tumble again later this afternoon as the US publishes its latest payroll figures.

Analysts said reports that Italy's centre-right alliance was reaching out to lawmakers from the Democratic Party to seek support for a broad governing alliance after Sunday's inconclusive election was also supporting Italian debt.

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